Costs
types of Costs
Dec 21, 2015
It gives brief description about the various costs like fixed cost variable costs.
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CostsCosts
Short-run costsShort-run costs
Total costTotal cost
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
Output(Q)
01234567
TFC(Rs.)
1212121212121212
Total costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TFC
Output(Q)
01234567
TFC(Rs.)
1212121212121212
Total costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TFC
Output(Q)
01234567
TFC(Rs.)
1212121212121212
TVC(Rs.)
010162128406091
Total costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
Output(Q)
01234567
TFC(Rs.)
1212121212121212
TVC(Rs.)
010162128406091
TFC
Total costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
TFC
Diminishing marginalreturns set in here
Total costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
Output(Q)
01234567
TFC(Rs.)
1212121212121212
TVC(Rs.)
010162128406091
TFC
Total costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
TFC
Output(Q)
01234567
TFC(Rs.)
1212121212121212
TVC(Rs.)
010162128406091
TC(Rs.)
12222833405272
103
Total costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TCOutput
(Q)
01234567
TFC(Rs.)
1212121212121212
TVC(Rs.)
010162128406091
TC(Rs.)
12222833405272
103
TVC
TFC
Total costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TC
TVC
TFC
Diminishing marginalreturns set in here
Total costs for firm XTotal costs for firm X
Short-run costsShort-run costs
Marginal cost = TC / QMarginal cost = TC / Q
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7
Deriving marginal costsDeriving marginal costs
Q TC MC0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
10 6 5 7122031
Costs (Rs.)
TC
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7
Deriving marginal costsDeriving marginal costs
Q TC MC0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
10 6 5 7122031
Costs (Rs.)
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7
Q TC MC0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
10 6 5 7122031
TC
TC = 12
Q = 1
Costs (Rs.) Deriving marginal costsDeriving marginal costs
TC
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7
MCDiminishingreturns set
in here
Costs (Rs.) Deriving marginal costsDeriving marginal costs
Q TC MC0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
10 6 5 7122031
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
MC
Costs (Rs.) Deriving marginal costsDeriving marginal costs
Diminishing marginalreturns set in here
Short-run costsShort-run costs
Average cost=TC / Q
Average cost=TC / Q
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Costs (Rs.)
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TVC AVC0 0 -1 10 102 16 83 21 74 28 75 40 86 60 107 91 13
Costs (Rs.)
AFC
3
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TVC AVC0 0 -1 10 102 16 83 21 74 28 75 40 86 60 107 91 13
Costs (Rs.)
AFC
AVC
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC AC0 12 1 22 222 28 143 33 114 40 105 52 10.46 72 127 103 14.7
Costs (Rs.)
AFC
AVC
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC AC0 12 1 22 222 28 143 33 114 40 105 52 10.46 72 127 103 14.7
Costs (Rs.)
AC
AFC
AVC
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC MC0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
10 6 5 7122031
Costs (Rs.)
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
MC
Q TC MC0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
10 6 5 7122031
Costs (Rs.)
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC MC AC0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
10 6 5 7122031
MC -2214111010.41214.7
Costs (Rs.)
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC MC AC0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
10 6 5 7122031
MC -2214111010.41214.7
Costs (Rs.)
AC
Output (Q)
Co
sts
(Rs.
)
AFC
AVC
MC
x
AC
z
y
Average and marginal costsAverage and marginal costs
Long-run costsLong-run costs
Long-run costs=TC / Q
Long-run costs=TC / Q
Alternative long-run average cost curvesAlternative long-run average cost curves
OutputO
Co
sts
LRAC
Economies of Scale
OutputO
Co
sts
LRAC
Diseconomies of Scale
Alternative long-run average cost curvesAlternative long-run average cost curves
OutputO
Co
sts
LRAC
Constant costs
Alternative long-run average cost curvesAlternative long-run average cost curves
A typical long-run average cost curveA typical long-run average cost curve
OutputO
Co
sts
LRAC
OutputO
Co
sts
LRACEconomiesof scale
Constantcosts
Diseconomiesof scale
A typical long-run average cost curveA typical long-run average cost curve
Long-run average and marginal costsLong-run average and marginal costs
OutputO
Co
sts
LRAC
LRMC
Economies of Scale
OutputO
Co
sts
LRAC
LRMC
Diseconomies of Scale
Long-run average and marginal costsLong-run average and marginal costs
OutputO
Co
sts
LRAC = LRMC
Constant costs
Long-run average and marginal costsLong-run average and marginal costs
OutputO
Co
sts
LRMC
LRAC
Initial economies of scale,then diseconomies of scale
Long-run average and marginal costsLong-run average and marginal costs
Long-run costsLong-run costs
Relationship between short-run and long-run
AC curves
Relationship between short-run and long-run
AC curves
Deriving long-run average cost curves: factories of fixed sizeDeriving long-run average cost curves: factories of fixed size
SRAC3
Co
sts
OutputO
SRAC4
SRAC5
5 factories
4 factories3 factories2 factories
1 factory
SRAC1 SRAC2
SRAC1
SRAC3
SRAC2 SRAC4
SRAC5
LRAC
Co
sts
OutputO
Deriving long-run average cost curves: factories of fixed sizeDeriving long-run average cost curves: factories of fixed size
Co
sts
OutputO
Examples of short-runaverage cost curves
Deriving long-run average cost curves: choice of factory sizeDeriving long-run average cost curves: choice of factory size
LRAC
Co
sts
OutputO
Deriving long-run average cost curves: choice of factory sizeDeriving long-run average cost curves: choice of factory size
Explicit and Implicit CostsExplicit and Implicit Costs
Explicit Costs : The money payment that a firm makes to the outsiders who supply inputs.These are the “out of pocket ” costs.Eg. Salaries, price paid for raw material, components etc.
Explicit Costs : The money payment that a firm makes to the outsiders who supply inputs.These are the “out of pocket ” costs.Eg. Salaries, price paid for raw material, components etc.
Implicit Costs : The costs of the “self owned” resources which are employed by the firm and are non – expenditure costs.
Eg. Salary of the proprietor, interest on the entrepreneur’s own investment etc.
Economic Profit versus Accounting Profit
Economists measure a firm’s economic profit as total revenue minus all the opportunity costs
(explicit and implicit).
Accountants measure the accounting profit as the firm’s total
revenue minus only the firm’s explicit costs. In other words, they
ignore the implicit costs.
Economic Profit versus Accounting Profit
When total revenue exceeds both explicit and implicit costs, the
firm earns economic profit.
Economic profit is smaller than accounting profit.
Economic Profit versus Accounting Profit
RevenueTotalopportunitycosts
How an EconomistViews a Firm
Explicitcosts
Economicprofit
Implicitcosts
Explicitcosts
Accountingprofit
How an AccountantViews a Firm
Revenue
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