The document discusses different types of costs involved in production including money costs, real costs, opportunity costs, total costs, average costs, and marginal costs. It defines these terms and explains how they are calculated. For example, total cost is the sum of fixed and variable costs, average cost is total cost divided by output, and marginal cost is the change in total cost from producing one more unit. The document also discusses short-run and long-run cost curves including how average and marginal costs are related in both the short-run and long-run.

1. THEORY OF COSTSMEANING OF COSTS OF PRODUCTION

2. In order to produce a good every firm makes use of factor of production so the amount spent on the use of factor of production is called factor of production cost of production mainly depends upon the quantity of productionC=f(Q)Here, C=CostF=FunctionQ=Quantity

3. Cost Of ProductionMoney costsReal CostsOpportunity costsTotal CostsAverage CostsMarginal costsExplicit CostsImplicit Cost

4. Money CostsAccording to Prof. HansonThe money cost of a producing a certain output of a commodity is the sum of all the payments to the factors of production engaged in the production of that commodity.

5. Therefore, money costs include the following expenses:Depreciation and obsolescence charges.Power fuel charges.Wages and salaries.Cost of machinery, raw material etc.Expenses on advertising and publicity.Interest on capital.Expenses on electricity.Insurance charges.Transport costs.Packing charges.All types of taxes viz ; property tax , licence fees, exise duty.Rent on land.

6. Money costs of a firm include two costs as following:Explicit costs Implicit costsExplicit costs :- According to LEFTWITCH“Explicit costs are those cash payments which firms make to outsiders for their services and Goods.” This cost includes, payment of raw material, taxes and depreciation charges, transportation, power, high fuel, advertising and so on.2.Implicit costs :- According to LEFTWITCH“Implicit costs are the costs of self-owned, self employed resources.”This cost includes the interest on his own capital, rent on his land, wages of his own labour etc.

7. Real CostsReal costs refers to all those efforts and sacrifies undergone by various members of the sosiety to produce a commodityProf. MARSHAL has called these costs as the “social costs of production”

8. Opportunity CostsWhen resourses are used for producing a given commodity , then some amounts of other commodities in whose production, these resources could have been helpful, has to be sacrifiesFor example: The alternative or opportunity cost for producing one unit of commodity X is amount of Y.That must be sacrifies in order to produce X rather than Y.

9. Theories of costsCost of ProductionAverage CostMarginal CostTotal Cost

10. Short run cost curvesTotal costAccording to Dooley :“Total cost of production is the sum of all expenditures incurred in producing given volume of output.”Total costs is the combination of fixed costs and variable costs TC = FC+VCHere, TC= Total costFC= Fixed costVC=Variable cost

11. Total Fixed CostAccording to Anatol Murad :- “Fixed costs are costs which do not change with change in the quantity of output.”Total Variable CostAccording to Dooley :-“Variable costs are one which vary as the level of output varies.”

13. Average costAccording to Dooley :-“The Average cost of production is the total cost per unit of output.”It includes average fixed cost and average variable cost.AC=TC/QHere, AC=Average costTC= Total costQ= Output

14. Average fixed cost“Average fixed cost is the total fixed cost divided by the number of units of output produced.”AFC=TFC/QHere, AFC=Average fixed costTFC=Total fixed costQ=Output

15. Average variable cost“Average variable cost is the total variable cost divided by the number of units of output produced.”AVC=TVC/QHere, AVC=Average variable costTVC=Total variable costQ=Output

17. Marginal Cost“Marginal cost is the addition made to Total Cost caused by producing one more unit of output.” According to Ferguson: “Marginal cost is the addition to Total Cost due to the addition of one unit of output”MC=TCn –TCn-1Here, MC=Marginal CostTCn=Total cost of ‘n’ unitsTCn-1= Total cost of ‘n-1’ units

18. The derivation of MC can be studied with the help of following table:

19. Relation between average and marginal costThe main points of relation between average and marginal cost are as under:Average cost and marginal cost can be calculated from total cost.When AC falls MC also falls.When AC arises MC also arises.MC cuts AC at its lowest point.When AC is constant MC becomes equal to AC.Use of MC and AC in price determination.Mutual interaction between MC and AC.

20. Long run cost curves“Long run is a period in which there is a suficient time to alter the equipment and the scale or organisation with a view to produce different quantities of output.”Long run Total CostThe long run total cost of production is the minimum possible cost of producing any given level of output when all inputs are variable. Long run TC is always less than or equal to short run Total cost, but it is never more than STC.

21. Long run Average cost curveLong run Average cost is the long run total cost divided by the level of output. LAC=LTC/QAccording to Robert Awh :- “The Long run average cost curve shows the lowest average cost of producing output when all inputs can be varied freely.”

22. Different names of LACLAC also known as these two following names:Envelope curvePlanning curve1.Envelope curve:- It envelopes all the SAC curves. It indicates that LAC cannot exceed SAC so this curve is called as envelope curve.2. Planning curve :- With the help of this curve a firm can plan as to which plant it should used to produce different quantities of output so that production is obtained at minimum cost.

23. Long run marginal costLong run marginal cost shows the change in total cost due to the production of one more unit of commodity.According to Robert Awh:-“Long run marginal cost curve is that which shows the extra cost incurred in producing one more unit of output when all inputs can be changed.”LMC= LTC/ QHere, LMC= Long run marginal cost LTC = Change in long run total cost Q = Change in output

24. Relation between LMC and LACThe relation between long run marginal cost and long run average cost is similar to that of what it is in short run AC and MC but the only difference in LAC and LMC is that long run marginal and average costs are more flatter than that of SAC and SMC. It is so because in long run all factors are variable.Relation between LMC and SMCSMC refers to the effect on total cost due to the production of one more unit of output on account of change in variable factors. When a firm selects a proper scale of plan in order to produce given quantity of output then at this level of output short run and long run marginal cost curves are equal.

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