Chapter 6 cost
Meaning: It refers to the money expenditure incurred by a firm on producing the output.
Types Of Cost
- Explicit Cost: It refers to those cash payments which a firm makes to outsiders for their goods & services.
- Implicit cost: It refers to the cost of production factors or factors of productions provided by the entrepreneur himself.
- Money Cost: The total money expenditure incurred on hiring and buying inputs for producing a commodity.
- Real Cost: it refers to the sacrifice, discomfort on pain through which a supplier goes through for production.
- Social Cost: It refers to the disadvantages of producing a commodity faced by the society.
- Difference between Explicit cost and Implicit cost
Difference between fixed Cost And Variable Cost
Diagrams
- TC = TFC + TVC
Total costs = total fixed costs + Total variable costs.
Schedule:
- AC = AFC + AVC
Average cost = Average fixed cost + Average variable cost.
AFC = TFC / N
AVC = TVC / N
- shape of the AFC cure is Rectangular Hyperbola.
- Can AFC be zero or touch X- axis?
NO, AFC can never be zero or touch x-axis as AFC is TFC divided by the number of units of employed where TFC is never zero that is why AFC can never be zero.
- Can AC and AFC curve touch/ meet/ intersect each other?
NO, because AC is summation ofAFC and AVC, for AC being equal to AVC, AFC has to be zero which is not possible as TFC is never zero.
so ultimately AC & AVC cannot meet/ touch/ intersect each other but they are not parallel.
Also their distance narrows down but never equal to zero.
- Why is AC curve U shaped?
AC is a combination of AFC and AVC. Initially when production begins AFC and AVC both fall and AC being the combination of both falls. later on AVC starts rising rapidly and AFC still falls again AC being the combination of both starts rising.
As all these costs are short run costs and are bring incurred in short run, so this law is applicable.
According to its initially. there are INCREASING RETURNS TO FACTOR which causes AC to fall.
Later on there are diminishing returns to factor which causes AC to rise which gives U shape to AC curve.
- Relationships between AC & MC
(a). When AC falls, MC also falls but MC rises before AC.
(b). When AC reaches its minimum MC cuts it from below.
(c). When AC is rising MC is also rising but MC rises at a higher rate.
- Relationship between AVC/ MC
(a). When AVC falls, MC also falls but rises before AVC.
(b). when AVC reaches at its minimum MC cuts it from below
(c). When AVC is rising, MC also rises bbut at a higher rate.
- Relationship between AC/MC/AVC
(a). When AC and AVC both fall, MC also falls but starts rising before AC & AVC.
(b). AC & aVc get cut at their minimum by rising MC from below.
(c). When AC and AVC starts rising MC also rises but MC rises at a higher rate.
- Relationship between TC/TVC/MC
(a). When TC & TVC increases at a diminishing rate, MC falls.
(b). When TC& TVC hit inflation, MC is lowest.
(c). When TC & TVC increases at an increasing rate, MC increases.
- Important for numerical:
(1). TC = TFC =TVC
(2). AC/ATC = AFC + AVC
(3). MCn = TCn - TVCn-1 (When output from '0')
(4). MCn = TVCn - TVCn-1 (When output from '1')
(5). TC = AC * Output
TFC = AFC * Output
TVC = AVC * Output
(6). At '1' Output MC = TVC = AVC
(7). When Output from '0' = ADD MC's to get TC
(8). When output from '1' = ADD MC's to get TVC
(9). If output is form '0' = TFC = TC and MC
(10). AC / ATC = TC
Output
(11). AFC = TFC
Output
(12). AVC = TVC
Output
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