Economics: Cost concept

1. Presentation on:
CONCEPT OF COST AND COST ANALYSIS
PRESENTED BY:
PRATIKSHA RAI

2. CONTENT:
1) What is cost
2) Types of cost
3) Why do determine opportunity cost
4) Difference between sunk and
opportunity cost
5) Theory of cost
6) Short run cost
7) Short run cost function
8) Types of short run cost

3. WHAT IS COST ?
 Cost refers to the amount of expenditure incurred in
acquiring some thing.
 The expenditure incurred to produce an output or
provide service.
 Thus the cost incurred in connection with raw material,
labour, other heads constitute the overall cost of
production.
 A Managerial economist must have clear
understanding of different cost concept for clear
business thinking and proper application.

4. TYPES OF COSTS
1. OPPORTUNITY COST
THE BEST ALTERNATIVE SCARIFICED FOR A CHOSEN OPPORTUNITY.
2. IMPLICT COST
A SACRIFICED INCOME ARISING FROM THE USE OF SELF OWNED RESOURCES BY FIRM.
3. EXPLICIT COST
ACTUAL PAYMENT DONE
4. SUNK COST
COST THAT ARE INCURRED IN PAST OR THAT HAVE TO BE INCURRED IN FUTURE.
5. ACCONTING COST
EXLPICIT COST
6. ECONOMIC COST
EXPLICIT + IMPLICIT COST

5. WHY DO WE DETERMINE OPPORTUNITY
COST ?
For effective decision making.
Calculating economic profit
(T.R – explicit cost – implicit cost)
Choosing best alternative

6. DIFFERENCE BETWEEN SUNK AND
OPPORTUNITY COST ?

7. THEORY OF COST
THEORY OF
COST
SHORT RUN LONG RUN

8. SHORT RUN COST
SHORT RUN
COST
VARIABLE COST
COST WHICH AFFECTED BY
CHANGE IN OUTPUT.
E.X-PRICE OF RAW MATERIAL,
LABOUR EMPLOYED ETC.
FIXED COST
COST NOT AFFECTED BY CHANGE
IN OUTPUT.
E.X-RENT, SALARY OF MANAGER
ETC.

9. SHORT RUN COST FUNCTION
The short run is defined as period of time.
C = f (Q)
Where,
C = Cost
f = function
Q= Quantity

10. SOME TYPE OF COST IN SHORT RUN
Total cost =Total variable cost + Total Fixed cost
a) Total Variable cost=cost which is affected by
change in output. (ex. Raw material, Fuel, Labour
etc.)
b) Total Fixed cost = it is independent of output that
is it is not affected by change in output (ex. Rent ,
salary of manager , watchman wages, property tax
etc.)
TC=TVC+TFC

11. c) Average variable cost =Total variable cost
Quantity
d) Average Fixed cost =Total Fixed cost
Quantity
e) Average Total cost= Total cost
Quantity
Marginal cost =Marginal cost is addition to total cost
by producing one more unit of output
MCn= TCn – (TCn-1)
where,
n is any particular unit