ECONOMICS COST CONCEPT

1. COST
BY – ROHIT MEHANI

2. Cost Concept:
 Cost is the total expenditure
incurred in producing a
commodity

3. Types of Cost:
 Total fixed costs (TFC)
 Average fixed costs (AFC)
 Total variable costs (TVC)
 Average variable cost (AVC)
 Total cost (TC)
 Average total cost (ATC)
 Marginal cost (MC)

4. Fixed Costs(FC)
Fixed Cost denotes the costs which do not vary with the level of production. FC
is independent of output.
Eg: Depreciation, Interest Rate, Rent, Taxes
 Total fixed cost (TFC):
All costs associated with the fixed input.
 Average fixed cost per unit of output:
AFC = TFC /Output

5. Variable Costs(VC)
Variable Costs is the rest of total cost, the part that
varies as you produce more or less. It depends on
Output.
Eg: Increase of output with labour.
 Total variable cost (TVC):
All costs associated with the variable input.
 Average variable cost- cost per unit of output:
AVC = TVC/ Output

6. Total costs(TC)
The sum of total fixed costs and total variable
costs:
TC = TFC + TVC
Average Total Cost
Average total cost per unit of output:
ATC =AFC + AVC
ATC = TC/ Output

7. Marginal Costs
 The additional cost incurred from producing an additional unit
of output:
MC =  TC
 Output
MC =  TVC
 Output

8. Typical Total Cost Curves
 TVC,TC is always increasing:
 First at a decreasing rate.
 Then at an increasing rate

9. Typical Average & Marginal
Cost Curves

10.  AFC is always declining
at a decreasing rate.
 ATC and AVC decline
at first, reach a
minimum, then
increase at higher
levels of output.
 The difference
between ATC and AVC
is equal to AFC.
 MC is generally
increasing.
 MC crosses ATC and AVC
at their minimum point.
 If MC is below the average
value:
 Average value will be
decreasing.
 If MC is above the average
value:
 Average value will be
increasing.

11. All costs are variable in the long run. There is
only AVC in LR, since all factors are variable.
Long Run Cost Curve

12. Economies of Scale:
Economies of scale are the cost advantages that a firm obtains
due to expansion. Diseconomies is the opposite.
Two types:
1. Pecuniary Economies of Scale:
Paying low prices because of buying in large Quantity.
2.Real Economies of Scale:
Refers to reduction in physical quantities of input , per
unit of output when the size of the firm increases, as a result input
cost minimized.

13. 1.Internal Economies:
It is a condition which brings about a
decrease in LRAC of the firm because of
changes happening within the firm.
2.External Economies:
It is a condition which brings about a
decrease in LRAC of the firm because of
changes happening outside the firm.
E.g. Taxation policies of government
Diseconomies: