The document discusses various cost concepts including: - Total cost, average cost, and marginal cost. Total cost depends on quantity produced, average cost is total cost divided by quantity, and marginal cost is the change in total cost from producing one additional unit. - Fixed and variable costs. Fixed costs do not change with quantity while variable costs do. Short-run costs include both. - Other concepts like opportunity cost, sunk costs, accounting costs, and more. Cost curves are also discussed showing the relationships between costs and quantity.

1. Concept of cost
Expenditure incurred for the production of
goods and services is known as cost . Cost curves
are derived by joining produced units and cost.
Amount of cost depends on the number of
goods produced . Concept of cost can be
explained as
Total cost
Marginal cost
Average cost

3. Total cost
• Total expenditure incurred for the production
of all units of goods is known as total cost .
Total cost depends on the number goods
produced that is why
• TC = f (Q)
• TC = A+bQ- cQ2 +dQ3
• TC = 10+6Q- 0.9Q2 +0.5Q3

4. Marginal cost
• The cost or expenditure by which total
expenditure increases due to increases in the
production of one additional units is known
as marginal cost . The expenditure which is
incurred for the production of last unit of
good is known as marginal cost .it is denoted
as follows
• MC = TCn+1 -TCN

5. Continue
• Where MC = marginal cost
• TCN+1 = total successding cost .
• TCN = preceding total cost
• MC =

6. Average cost
• When total cost is divided by the total
produced unit than this is known as average
production .
• AC =

7. Different Cost Concept
• Monetary cost
• Accounting cost
• explicit cost
• Implicit cost
• Imputed cost
• economic cost
• Historical cost
• Sunk cost
• Opportunity cost / Alternative cost
• Short run cost

8. Cost Concept
• Fixed cost (Supplementary Cost, Indirect Cost or
overhead cost )
• Variable cost ( prime cost or direct cost)
• Long –run cost
• Real cost
• out of pocket cost(Explicit cost) and book cost
• Social cost
• Private cost some times it also called opportunity cost
• Replacement cost
• Separable cost
• common cost

9. Monetary cost
• The expenditure which is measured in
monetary unit is known as monetary cost. It is
also called Actual cost/ Outlay cost/ Absolute
cost / Accounting cost:
• The cost or expenditure which a firm incurs for
producing or acquiring a good or service. (Eg.
Raw material cost) is known as monetary cost.

10. Accounting cost
• Expenditure recoded by the accounting
department is known as accounting cost . It is
explicit cost. The expenditure made for the
raw materials , labours , heating , rent , etc.

11. Explicit cost
• The expenditure paid for the outsiders is
known as explicit cost . It is expressed in
monetary unit, it is also called out of pocket
cost .
• The Cost actually paid by the firm is explicit
cost. If the factors of production are hired or
rented then it is an explicit cost.

12. Implicit cost
• The expenditure which is not directly expressed
in monetary unit is known as implicit cost . It is
the cost of service rendered by the owner of the
business. It is not directly recoded by the
accounting department. cost of foregone
activities, cost of owners land, interest of own
capital, rent of own house etc are called implicit
cost .
• If the factors of production are owned by a firm
then its cost is implicit cost.

13. Imputed cost
• The cost which is calculated for the use of
owners labour , house, capital , land and
others equipment is known as imputed cost.

14. Replacement cost:
• The price that would have to be paid currently
for acquiring the same plant is called
replacement cost

15. Incremental cost:
• Incremental cost Is the addition to costs
resulting from a change in the nature of level
of business activity. Change in cost caused by
a given managerial decision.

16. Book cost
• Book cost: Costs which do not involve any
cash payments but a provision is made in the
books of accounts in order to include them in
the profit and loss account to take tax
advantages is known as book cost.
• .

17. Social cost
• Total cost incurred by the society on account
of production of a good or service is social
cost.
• The effect or cost taken by the community or
society due to the establishment of industry
or factory is known as social cost such as
environment pollution ,air pollution etc.

18. Transaction cost:
• Transaction cost: The cost associated with the
exchange of goods and services.

19. Controllable cost
• Controllable cost: Costs which can be
controllable by the executives are called as
controllable cost.

20. Direct cost
• Expenditure paid for the raw material, wages,
rent, to the outsiders is known as direct cost.
It is also called operating cost .

21. Economic cost
• The sum of all explicit and, implicit cost is
known as economic cost .Economic costs are
related to future. They play a vital role in
business decisions as the costs considered in
decision - making are usually future costs.
They are similar in nature to that of
incremental, imputed explicit and opportunity
costs.

22. Opportunity cost
• The cost for the nearest best alternative is known
as opportunity cost .
• The cost for the nearest forgone alternative is
known as opportunity cost .
• The revenue which could have been earned by
employing that good or service in some other
alternative uses. (Eg. A land owned by the firm
does not pay rent. Thus a rent is an income
forgone by not letting it out) is opportunity cost.

23. Sunk cost
• The expenditure which is made for one place
or one purpose and it can not be replaced or
changed for other activities is known as sunk
cost .
• Sunk cost are retrospective (past) costs that
have already been incurred and cannot be
recovered.

24. Historical cost
• Expenditure made for the establishment of
business is known as historical cost .
• Historical cost is the price that is paid for a
plant originally at the time of purchase.

25. Variable cost
• Expenditure incurred for the use of variable
factor is known as variable cost . It is made in
short run , because in short run some factors
are assumed constant and some factors are
assumed variable .
• The factors which are changed in short run are
known as variable factors .
• it is also called prime cost or direct cost .

26. continue
• Variable cost: When output has increased the
firm spends more on these items.
• For example the money spent on labour
wages, raw material and electricity usage.
Variable costs vary according to the output.
• In the long run all costs become variable.

27. Fixed cost
• The factors which are not changed in short are
known as fixed factors
• Expenditure for the use of fixed factors is known
as fixed factors .
• It is also called supplementary cost or indirect
cost or overhead cost.
• Some inputs are used over a period of time for
producing more than one batch of goods. The
costs incurred in these are called fixed cost.
• For example amount spent on purchase of
equipment, machinery, land and building.

28. Short Run Cost
• The period in which all factors are not
changed is known as short run . In this period
only variable factors are changed .
• Expenditure made for the short run is known
as short run cost .
• Short run cost are classified as follows :
• STC = TFC + TVC

29. Short run cost
• TFC : The expenditure which is paid for the
fixed factors is called fixed cost.
• TVC: The expenditure which is paid for the
variable factor is called total variable cost .In
short run only variable factor changes that is
why variable cost changes but fixed cost
remains the same .

30. Replacement cost
• Expenditure needed for the purchase of new
capital goods in place of old one is known as
replacement cost .

31. Book cost
• Expenditure recorded on the entry book is
known as book cost .

32. Real cost
• Sacrifice made by the owner is known as real
cost .

33. Common cost
• The expenditure which can not be separable
from each other goods is known as common
cost .

34. Private cost
• Expenditure made by individual is called
private cost .it is also called opportunity cost .

35. Imputed cost
• calculation or estimation of real cast is known
as imputed cost .

36. Actual cost
• total expenditure needed for the production
of goods and services is called actual cost .

37. continue
• Average cost: Total cost divided by the level of
output.
• Average variable cost: Variable cost divided by
the level of output.
• Average fixed cost: Total fixed cost divided by
the level of output.
• Marginal cost: Cost of producing an extra unit
of output.

38. Short run cost and cost curve
• Short run is the period is the period in which
all the factors of production can not be
changed . the factors which are not changed
are called fixed factors and which can be
changed are known as variable factors .
• Short run cost is defined as follows
Short run total cost = short run fixed cost
+short run variable cost
STC = TFC +TVC

39. continue
• Total fixed cost : the expenditure made for the fixed
factors is called fixed cost .
• Total variable cost :expenditure used for variable factor
is called variable cost .
• law of variable proportion is applied in short run
therefore total production increase at increasing rate at
the beginning, due to this reason total cost increases at
decreasing rate.On the other hand when total
production decreases total cost increases at increasing
rate .
• short run total cost are explained with the help of
following table and figure .

40. Numbers of
workers
Output
(Q)
Wage rate Total variable
cost
Total fixed
cost
Short run
total cost
0 0 60 0 120 120
1 10 60 60 120 180
2 22 60 120 120 240
3 36 60 180 120 300
4 52 60 240 120 360
5 70 60 300 120 420
6 86 60 360 120 480
7 100 60 420 120 540
8 112 60 480 120 600
9 122 60 540 120 660
10 130 60 600 120 720
11 137 60 660 120 780
12 143 60 720 120 840
13 148 60 780 120 900
14 152 60 840 120 960

41. TFC
TVC
TC
O
X
O
Y
Output
Cost

42. continue
• TFC: total fixed cost remains the same that is why
TFC curve is parallel to the OX axis. It starts above
the origin .
• the nature of TVC is just like the opposite of
English letter S it only change in the short run. it
starts form the origin. When production starts
total variable cost also starts .
Total cost is the sum of TVC and TFC so it starts
the point form where TFC starts. The nature of
TVC is similar to AVC because it depends on AVC
in short run .

43. Short run average and marginal cost
and cost curve .
• Average fixed cost (AFC): AFC is obtained by
dividing the total fixed cost with produced
quantity . AFC =
• AFC decreases form very beginning. At the
beginning it decreases rapidly and later on it
decreases slowly because total fixed cost
remains the same with each level of output .
Q
TFC

44. Average variable cost (AVC)
• AVC is obtained by dividing the total variable
cost with produced output .
Q
TVC
AVC 

45. Average cost (AC)
• it is obtained by dividing total cost with
produced quantity .
Q
TC
AC 

46. Marginal cost (MC)
• by which the total cost increases due to
increases in one additional unit of output is
known as marginal cost .
or MC =TCn+1 - TCn
Q
TC
MC




48. Worke
rs
Output
(Q)
Wage
rate
TVC AVC TFC AFC TC AC MC
0 0 60 0 0 120 0 120 0
1 10 60 60 6 120 12 180 18 6
2 22 60 120 5.45 120 5.45 240 10.9 5
3 36 60 180 5 120 3.35 300 8.33 4.28
4 52 60 240 4.61 120 2.30 360 6.92 3.75
5 70 60 300 4.28 120 1.71 420 6 3.33
6 86 60 360 4.19 120 1.39 480 5.58 3.75
7 100 60 420 4.20 120 1.20 540 5.40 4.28
8 112 60 480 4.29 120 1.07 600 5.36 5
9 122 60 540 4.42 120 0.98 660 5.41 6
10 130 60 600 4.62 120 0.92 720 5.54 7.50
11 137 60 660 4.82 120 0.87 780 5.69 8.57
12 143 60 720 5.03 120 0.84 840 5.87 10
13 148 60 780 5.27 120 0.81 900 6.08 12
14 152 60 840 5.52 120 0.79 960 6.32 15

49. O
X
Y
AFC
AVC
AC
MC
C
A
output
B
Q1

50. Derivation of Long Run Average Cost
Curve(LAC)
• All the factors of productions are changed in long
run. producer can change inputs as per the
requirement. Long run average cost curve is
derived with the help of short run average cost
curve.SAC are known as different mechanism,
these mechanism are changed to increase
production with low cost.
• When production cost increases then producer
uses new mechanism. Joining these all
mechanism or short run average cost curve LAC is
derived as follows .

51. Cost
SAC1 SAC2 SAC3
SAC4
SAC5 LAC
a
d
b
e
f
g i
j
k
h
O
a
X
output
Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10
Q1

52. Continue
• When LAC decreases it touches to the decreasing
part of SAC ,when LAC is minimum it touches to
the minimum part of SAC , when LAC is increasing
it touches to the increasing part of SAC .
• LAC curve is also called Planning curve because it
is derived by joining many short run average cost
curve to reduce per unit cost of production
.producer makes different plan to reduce cost
when cost increases it makes plan to use other
mechanism or SAC.

53. Continue
• LAC curve is also called envelop curve because
it includes many SAC curve .
• Lac curve is flatter than SAC curve because it
includes many SAC curve .
• Lac is less pounced U shaped then SAC
because it less more flatter then SAC.

54. SAC1
SMC2
SAC3
LAC1
SMC1
SAC2
SMC3
a
r
b
c
k
LMC
Q2
Q5 Q8
X
O
Y
OUT put
COST
Deviation of LMC curve

55. Per
unit
cost
X
Law of Increasing
Returns to Scale
Law of Constant
Returns to Scale
Law of Decreasing
Returns to Scale
B
C
LAC
A
D
Output
Y
O Q4
Q8
According to traditional Theory

56. Relationship Between Marginal Cost
And Average Cost Curve:
• The marginal cost and average cost curves are U
shaped because of law of diminishing returns.
• The marginal cost curve cuts the average cost curve
and average variable cost curves at their lowest point.
• Marginal cost curve cuts the average variable cost
from below.
• The AC curve is above the MC curve when AC is falling.
• The AC curve is below the MC when AC is increasing.
• The intersecting point indicates that AC=MC and that
is the minimum average cost with an optimum output.
(No more output can be produced at this average cost
without increasing the fixed cost of production)

57. Graph – Relationship Between
Average Cost And Marginal Cost

58. Optimum Output And Minimum Cost

59. Why LAC is U shaped
• Due to laws of return to scale LAC curve is U
shaped .
• In the long run producer expands business,
due to expansion of business economies of
scale and diseconomies of scale is applied
which is explained as follows:

60. Economies of Scale
• Economies of scale exist when long run average costs
decline as output is increased. Diseconomies of scale
exist when long run average cost rises as output is
increased. The economies of scale occur because of
• (i)Technical economies: the change in production
process due to technology adoption.
• (ii) Managerial economies
• (iii) Purchasing economies,
• (iv) marketing economies and
• (v)financial economies.

61. Continue
• Economies of scale means a fall in average
cost of production due to growth in the size of
the industry within which a firm operates.

62. Factors Causing Economies Of Scale:
• There are various factors influencing the
economies of scale of an organization. They
are generally classified in to two categories as
Internal factors and External factors.

63. Internal Factors:
1. Labour economies: if the labour force of a firm is
specialized in a specific skill then the
organization can achieve economies of scale due
to higher labour productivity.
2. Technical economies: with the use of advanced
technology they can produce large quantities
with quality which reduces their cost of
production.
3. Managerial economies: the managerial skills of
an organization will be advantageous to achieve
economies of scale in various business activities.

64. Continue
4. Marketing economies: use of various marketing
strategies will help in achieving economies of
scale.
5. Vertical integration: if there is vertical integration
then there will be efficient use of raw material
due to internal factor flow.
6. Financial economies: the firm’s financial
soundness and past record of financial
transactions will help them to get financial
facilities easily.

65. continue
7. Economies of risk spreading: having variety of
products and diversification will help them to
spread their risk and reduce losses.
8. Economies of scale in purchase: when the
organization purchases raw material in bulk
reduces the transportation cost and maintains
uniform quality.

66. External Factors:
1. Better repair and maintenance facilities: When
the machinery and equipments are repaired and
maintained, then the production process never
gets affected.
2. Research and Development: research facilities
will provide opportunities to introduce new
products and process methods.
3. Training and Development: continuous training
and development of skills in the managerial,
production level will achieve economies of scale.

67. Continue
4. Economies of location: the plant location plays a
major role in cutting down the cost of materials,
transport and other expenses.
5. Economies of Information Technology: advanced
Information technology provides timely accurate
information for better decision making and for
better services.
6. Economies of by-products: Organizations can
increase the economies of scale by minimizing
waste and can be environmental responsible by
using the by- products of the organization.

68. Factors Causing Diseconomies Of
Scale:
1. Labour union: continuous labour problem and
dissatisfaction can lead to diseconomies of scale.
2. Poor team work: Poor performance of the team
leads to diseconomies of scale.
3. Lack of co-ordination: lack of coordination among
the work force has a major role to play in causing
diseconomies of scale.
4. Difficulty in fund raising: difficulties in fund
raising reduce the scale of operation.

69. Continue
5. Difficulty in decision making: the managerial
inability, delay in decision making is also a factor
that determines the economies of scale.
6. Scarcity of Resources: raw material availability
determines the purchase and price. Therefore
there is a possibility of facing diseconomies in
firms.
7. Increased risk: growing risk factors can cause
diseconomies of scale in an organization. It is
essential to reduce the same.

71. L shaped LAC curve or Learning Curve
• LAC curve is also called the modern cost curve
Cost
Out put
Lac
o
X
Y

72. Continue
• Learning cost theory is based on the learning by
doing.
• In the modern organization producer produces
goods and services in the long run, when she/he
produces for a long period of time then producer
learns new knowledge, skill, technique,
coordinating capacity, ability experience,
innovates new idea, increases efficiency, develops
new technology by which per unit production
cost decreases.

73. Continue
• Producers try to decrease per unit cost, if they can’t
decrease, they try to keep it constant so the long run
cost curve or learning curve is “L” shaped.
• Long run cost function can be expressed as follows
• C =aQ-b
• C = cost of production
• a= input cost per unit of output produced .
• b= rate of decline in cost of producing per unit output.

74. L shaped Long run cost curve
• modern economist say that long run average
cost is L shaped not U shaped following are
the main causes .
• Production and Technical economies
• Managerial efficiency
• Technical progress
• Learning by doing

75. Technical progress and LAC curve
LAC
a
b
c
d
LAC
LAC2
LAC3
LAC4