COST & ECONOMICS

1. UNIT - 3
ECONOMICS COSTS
ECONOMIES AND DISECONOMIES OF SCALE

2.  The economist’s idea of cost is based on the fact
that resources are scares and have alternative
uses.
 Thus if resources are used for the production of
some commodities, then it means that the
production of some alternative commodities are
forgone.

3. OPPORTUNITY COST
 The cost of this choice is the benefit of the next best
alternative foregone. This is called opportunity cost.
 This choice implies sacrifice of other alternatives. hence
cost of this choice will be evaluated in terms of the
sacrificed alternatives.
 Therefore, opportunity cost is the highest valued benefit
that must be sacrificed as a result of choosing
alternative.

5. EXPLICIT COST- OUT OF POCKET COSTS
 The money payment, which a firm makes to those
‘outsiders’ who supply labour services, raw
materials, transport services, electricity etc. are
called explicit costs

6. IMPLICIT COST
 The cost of “self owned” resources
 Salary of proprietor
 Interest on entrepreneurs own investment
 Rent on own land

7. FIXED COST & VARIABLE COST
 SHORT RUN & LONG RUN

8. SHORT RUN

9. AVOIDABLE AND UNAVOIDABLE COST
 At times a firm faces a problem of retrenchment or
contraction , costs which can be avoided are called
as avoidable costs and costs which cannot be
avoided are called as unavoidable costs.

10. INCREMENTAL AND SUNK COSTS
 Costs which increases because of expansion of a
firm are called incremental costs.
 Cost which have to be born whether there is
expansion or not are called sunk costs

11. IF COMPANY WANTS TO PURCHASE A
MACHINE
 Cost of purchase
 Installation charges
 Maintenance charges
 Operational charges

12. COMMON AND TRACEABLE COSTS

13. HISTORICAL AND REPLACEMENT COSTS

14.  Total fixed costs
 Total variable costs
 Total costs = Total fixed costs + Total variable costs

15. AVERAGE FIXED COSTS

 AFC= TFC/Units of output

16. AVERAGE VARIABLE COSTS
 TVC/Units of output

17. TOTAL AVERAGE COSTS
 TOTAL AVERAGE COSTS= AFC+AVC

18. MARGINAL COST
 MC= Change in total costs/ change in output

19. DISECONOMIES OF SMALL SCALE PRODUCTION
 Expenses
 Labour costs
 Wastage
 No real feel of market

20. ECONOMIES OF SCALE
 Internal economies are those advantages of large
production which accrue to a firm on account of its
superior technique and management

21. TECHNICAL ECONOMIES

22. COMMERCIAL ECONOMIES

23. MANAGERIAL ECONOMIES

24. FINANCIAL ECONOMIES

25. RISK AND UNCERTAINTY

26. EXTERNAL ECONOMIES

27. DISECONOMIES OF LARGE SCALE
PRODUCTION
 As a firm expands beyond a certain limit,it becomes
unmanageable and unwieldy.
 Management and supervision becomes difficult
 Labour unions
 Loss of coordination ( No direct contact with
customers)

28.  Overproduction
 Cut throat competition

29.  Adaptation
 International relations

30. 1
 TC=100+50Q-11Q2+Q3
 FIND:
MC,AC & AVC
 PROVE THAT MC PASSESS THROUGH MINIMUM POINT OF AVC

31. 2
 TVC=50Q-10Q2+Q3
 FIND THE LEVEL OF OUTPUT WHERE MC IS A
MINIMUM
 FIND THE LEVEL OF OUTPUT WHERE AVC IS A
MINIMUM

32. Q TC FC VC ATC AFC AVC MC
0 125 125 0
10 175 125 50 17.5 12.5 5
20 125 10.50 6.25
30 125 110 4.16
40 255 125 3.125
50 125 2.5
60 125 2.08 3
70 125 5 1.78
80 125 295 1.56

33. Q TC TFC TVC AFC AVC ATC MC
0
1 200 100 100
2 290 95
3 123
4 110 71
5 420 20 84 80
6 103.8
7 751 107.28 128
8 801
9 1098 998 197
10 10 123.2

34. Q TC TFC TVC AFC AVC ATC MC
0 100 100
1 200 100 100 100 100 200 100
2 290 100 190 50 95 145 90
3 369 100 269 33.33 89.66 123 109
4 440 100 340 25 85 110 71
5 520 100 420 20 84 104 80
6 622.8 100 522.8 16.66 87.13 103.8 102.8
7 751 100 651 14.28 93 107.28 128
8 901 100 801 12.5 100.12 112.62 150
9 1098 100 998 11.11 110.88 122 197
10 1332 100 1232 10 123.2 133.2 234

35. 4.
 For a firm, the average cost function is estimated as
AC = 100/Q + 20 + 4Q
 What is total variable cost for the firm at an output
of 15 units?

36. 5.
 If the production function is Q = 20K 0.3 L 0.3, what is
the marginal rate of technical substitution of labor
for capital?

37. 6.
 Which of the following cost functions signifies a
long-run cost function?
 a. TC = 250 + 3Q b. TC = 300
 c. TC = 50 + 100Q + 2Q2 d. Both (b) and (c)
 e. None of the above.

38. 7.
 Mr. Subba Rao, owner of Billow Garments &
Brothers, employs labor and knitting machines as
inputs to produce woolen garments. The following
are the marginal productivity functions of labor and
capital for the firm:
 MPK = 0.75L0.75/K0.25 , MPL = 0.75 K0.75/L0.25
 If the wage paid to the laborers is Rs.8 and the cost
of capital is Rs.5 each, what is the cost minimizing
proportion of L to K?

39. 8.
 The production function of a firm is Q = 250L0.5.
What should be the quantity of labor that the firm
should hire to maximize total profits, when price of
the good is Rs.2 and wage rate is Rs.25.

40. 9
 If the total cost function is TC = 200 – 4Q + 6Q2 and
the output is 4 units, what is the marginal cost ?