1) A firm is an organization that employs resources to produce goods or services with the aim of making a profit. A firm's cost of production is the total expenditures required to produce a specific level of output. 2) Costs include explicit costs like wages that are directly paid, and implicit costs like foregone opportunity that is not directly paid. Short-run costs are divided into fixed costs that do not vary with output and variable costs that do vary. 3) Per unit costs include average fixed cost, average variable cost, average cost, and marginal cost which is the change in total cost from an additional unit of output. These concepts and cost curves are used to analyze costs of production in the short and long

1. Firm’s Cost of Production
Shakeel Ahmed Qureshi

2. Firm
• We can define a firm (company, enterprise) as an organization that employs
productive resources to obtain products and/or services which are offered in the
market with the aim of making a profit.
Or
• A firm is a commercial enterprise, a company that buys and sells products and/or
services to consumers with the aim of making a profit. In the world of commerce,
the term is usually synonymous with ‘company’, or ‘business’
Firm’s Cost of Production
• Whatever expenditures a firm has to make to produce a specific level of output is
called the cost of production of the firm.

3. COST
Explicit cost
Short run cost
Total Cost
Total fixed cost
Total variable
cost
Average Cost
Average fixed cost
Average Variable
Cost
Marginal Cost
Long run cost
Long run Average Cost
Long run Marginal Cost
Implicit cost Opportunity cost
Kinds of Costs according to payment

4. Explicit cost
An explicit cost is a direct payment made to others in the course of running a business, such
as wage, rent and materials. These are costs that a firm directly pays for and can be seen
on the accounting sheet. Explicit costs can be variable or fixed, just a clear amount.
Implicit cost
In economics, an implicit cost, also called an imputed cost and payment is not made other,
implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in
order to use a factor of production for which it already owns and thus does not pay rent. It
is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is
any cost that results from using an asset instead of renting it out or selling it. The term
also applies to foregone income from choosing not to work.
Opportunity cost
Opportunity costs represent the potential benefits an individual, investor, or business
misses out on when choosing one alternative over another. The idea of opportunity costs
is a major concept in economics.

5. Short Run Costs
Conceptually, in the short run, the quantity of at least one input is fixed and the quantities of the
other inputs can be varied. In the short-run period, factors, such as land and machinery, remain the
same. On the other hand, factors, such as labor and capital, vary with time. In the short run, the
expansion is done by hiring more labor and increasing capital. The existing size of the plant or
building cannot be increased in case of the short run.
Fixed Costs (FC) The costs which don’t vary with changing output. Fixed costs might include the
cost of building a factory, insurance and legal bills. Even if your output changes or you don’t produce
anything, your fixed costs stay the same.
Variable Costs (VC) Costs which depend on the output produced. For example, if you produce
more cars, you have to use more raw materials such as metal. This is a variable cost.
Total Cost (TC): The total expenditures made by a firm to produce certain level of output is called
the Total Cost of the firm. OR
The sum of rewards of factors of production involved in producing a certain level of output is called the
Total cost of the firm.
Total cost has two parts that is Total Fixed Cost and Total Variable Cost.
TC = TFC + TVC

6. CONCEPT OF PER UNIT COSTS
Average Fixed Cost (AFC): When the total fixed cost is divided by the total units of
output then it is called average fixed cost.
AFC= =
𝑇𝐹𝐶
𝑄
Average Variable Cost (AVC): When the total variable cost is divided by the total
units of output then it is called average variable cost.
AVC=
𝑇𝑉𝐶
𝑄
Average Cost (AC): When the total cost is divided by the total units of output then it
is called average cost of production.
AC=
𝑇𝐶
𝑄
Marginal cost (MC): The change in total cost of production due to producing one
additional unit of the good is called marginal cost.
𝑀𝐶 =
∆𝑇𝐶
∆𝑄

7. Output
(Q)
TFC TVC TC
𝑇𝐹𝐶 + 𝑇𝑉𝐶
AFC
𝑇𝐹𝐶
𝑄
AVC
𝑇𝑉𝐶
𝑄
AC
𝑇𝐶
𝑄
MC
∆𝑇𝐶
∆𝑄
0 24 0 24 - - - -
1 24 28 52 24 28 52 28
2 24 54 78 12 27 39 26
3 24 75 99 8 25 33 21
4 24 96 120 6 24 30 21
5 24 126 150 4.8 25.2 30 30
6 24 168 192 4 28 32 42
7 24 214 238 3.4 30.6 34 46
8 24 264 288 3 33 36 50

8. 0
50
100
150
200
250
300
350
0 1 2 3 4 5 6 7 8
TFC
TVC
TC
Q
TFC
TVC
TC
Outpu
t
(Q)
TFC TVC TC
𝑇𝐹𝐶
AF
C
𝑇𝐹𝐶
𝑄
AVC
𝑇𝑉𝐶
𝑄
AC
𝑇𝐶
𝑄
MC
∆𝑇𝐶
∆𝑄
0 24 0 24 - - - -
1 24 28 52 24 28 52 28
2 24 54 78 12 27 39 26
3 24 75 99 8 25 33 21
4 24 96 120 6 24 30 21
5 24 126 150 4.8 25.2 30 30
6 24 168 192 4 28 32 42
7 24 214 238 3.4 30.6 34 46
8 24 264 288 3 33 36 50

9. 0
10
20
30
40
50
60
1 2 3 4 5 6 7 8
Q
AFC
MC
AC
AVC
AC, AFC
AVC, MC
Outpu
t
(Q)
TFC TVC TC
𝑇𝐹𝐶
AF
C
𝑇𝐹𝐶
𝑄
AVC
𝑇𝑉𝐶
𝑄
AC
𝑇𝐶
𝑄
MC
∆𝑇𝐶
∆𝑄
0 24 0 24 - - - -
1 24 28 52 24 28 52 28
2 24 54 78 12 27 39 26
3 24 75 99 8 25 33 21
4 24 96 120 6 24 30 21
5 24 126 150 4.8 25.2 30 30
6 24 168 192 4 28 32 42
7 24 214 238 3.4 30.6 34 46
8 24 264 288 3 33 36 50

10. Long run Average Cost

11. Long run Marginal Cost

12. Firm’s Cost of Production
Shakeel Ahmed Qureshi