This document discusses different types of costs in economics including total, fixed, variable, average, and marginal costs. It defines each type of cost using mathematical formulas. Total cost is the sum of total fixed costs and total variable costs. As production volume increases, average fixed cost decreases in a rectangular hyperbola shape. Marginal cost is the change in total cost from producing one additional unit and the marginal cost curve is U-shaped, initially high and then decreasing to a minimum point before rising again. The document provides a numerical example to illustrate the different cost concepts.

1. Theory of Costs
(Short Term)

2. VARIABLE
COST
FIXED
COST
COST
• Cost is the sum of money incurred by the firm
to produce goods and services.
TC = TFC + TVC
COST

3. 0
50
100
150
200
250
0 1 2 3 4 5
FC
VC
TC
Production ( in Units)
Cost(inRupees)
TYPES OF COST

4. Average Fixed Cost (AFC) = TFC/Q
Where TFC = Total Fixed Cost and
Q = Total number of units produced
As Volume of units Increases, the unit fixed
decreases, forming a curve in shape of a
rectangular hyperbola.
AVERAGE FIXED COST

5. Costs
O Q
AFC
AVERAGE FIXED COST

6. AVERAGE VARIABLE COST
Average Variable Cost (AVC) is the Total Variable
Cost(TVC) of a firm divided by the total units of
output.
Costs
O Q
AVC
AVC = TVC/Q

7. AVERAGE COST
Average Cost (AC) is the Total Cost(TC) of a firm
divided by the total units of output(Q).
Costs
O Q
AC
AC = TC/Q

8. MARGINAL COST
The additional cost incurred to produce one
additional unit of output is called the marginal
cost.
MC = C/ Q
The marginal cost curve is U-shaped. Marginal cost
is relatively high at small quantities of output-
Then as production increases, it declines- then
reaches a minimum value- then rises.

9. COSTS(C)
OUTPUT(Q)
MC
MARGINAL COST CURVE

10. NUMERICAL EXAMPLE
Q TFC TVC TC AFC AVC AC MC
0 100 0 100 - - - -
1 100 20 120 100 20 120 20
2 100 37 137 50 18.5 68.5 17
3 100 52 152 33.33 17.33 50.67 15
4 100 80 180 25 20 45 28
5 100 120 220 20 24 44 40
6 100 165 265 16.67 27.5 44.17 45

11. Costs
O Q
AC
AVC
AFC
MC
x
y
z
Graphical Example

12. THANK YOU
Prasanth Narisetty
PGDM