Cost of production
Objectives
Distinguish between the meaning of cost as used in business and as used in micro economics.
Explain the meaning and importance of various concepts of cost such as, explicit cost, implicit cost
and normal profit in micor economics.
Distinguish between fixed costs and variable costs and explain the concepts of total cost, average
cost and marginal cost.
Find out total cost from marginal cost and average cost and explain the importance of these costs
for a producer.
Find out total fixed cost, total variable cost, average fixed cost, average variable cost,
average total cost and marginal cost.
Points to remember
Production involves cost.
Money costs or explicit are not the only costs in micro economics.
The concept of cost as used in business generally refers to money or explicit cost.
Cost in micro economics includes Explicit Cost, Implicit Cost and Normal Profit.
Cost may be classified into private costs and social costs.
Private costs are the costs borne by an individual firm in producing a commodity.
Social costs are the cost of producing a commodity born by the society as a whole.
Cost is classified into fixed cost and variable cost.
Fixed costs do not change with a change in output.
Variable costs change with every change in output.
total cost is the sum of total fixed cost and total variable cost.
total cost changes with a change in output.
Changes in total cost are due to changes in variable cost only.
Average cost can be obtained by dividing total cost by quantity of output produced.
Average fixed cost equals total fixed cost divided by quantity of output.
Average variable cost can be obtained by dividing total variable cost by quantity of output.
Sum of average fixed cost and average variable cost is average total cost.
Marginal cost of producing output is the additional cost incurred on producing the last unit of output.
Marginal cost of producing output also equals the additional variable cost incurred on producing
the last unit of output.
What you have learnt :)
In Micro Economics, cost is the sum of (a) explicit cost (b) Implicit cost and (c)Normal profit.
It is different from cost used in business which includes only explicit cost.
Explicit cost is the list of imputs hired and purchased from the market. It is also called money cost.
Implicit cost is the cost of inputs which are owned and supplied by the entrepreneur himself in the
production of a commodity. It is equal to the opportunity cost of these inputs.
Normal profit is the minimum supply prices of the entrepreneur which he must get in order to remain
in the present business.
Private cost is the cost which a firm has to incur in the production of a commodity.
Social cost is the cost to the society as a whole for producing a commodity in the form of air-pollution
, water pollution and noise pollution etc
Fixed costs the cost which do not change with change in the level of output.
Variable costs are the cost that directly vary with changes in the level of output.
Total cost is the sum of total fied costs(TFC) and Total Variable cost(TVC).
Average fixed cost is the per unit fixed ost of the output produced. It goes on decreasing with the
increase in output.
Average variable cost(AVC) is the per unit variable cost of output produced.
Average total cost(ATC) is the sum of the AFC as AVC.
Marginal Cost(MC) is the addition to TC by the production of are addition unit of product.
Terminal exercise :)
What is implicit cost? How is it different from explicit cost?
What is explicit cost? Distinguish it from implicit cost?
Explain the concept of 'normal profit'. justify that it is an element of cost in micro economics.
Explain the various elements of cost in micro economics.
Differentiate between the concepts of cost as used in business and in micro economics?
Distinguish between fixed cost and variable cost with suitable examples.
Explain the relationship between output and average fixed cost.
Distinguish between AFC and AVC and describe how these are calculated.
Explain ther term marginal cost, show with the help of example how is it calculated.
Which cost, fixed or variable, determine marginal cost? give reasons.
Distinguish between the meaning of cost as used in business and as used in micro economics.
Explain the meaning and importance of various concepts of cost such as, explicit cost, implicit cost
and normal profit in micor economics.
Distinguish between fixed costs and variable costs and explain the concepts of total cost, average
cost and marginal cost.
Find out total cost from marginal cost and average cost and explain the importance of these costs
for a producer.
Find out total fixed cost, total variable cost, average fixed cost, average variable cost,
average total cost and marginal cost.
Points to remember
Production involves cost.
Money costs or explicit are not the only costs in micro economics.
The concept of cost as used in business generally refers to money or explicit cost.
Cost in micro economics includes Explicit Cost, Implicit Cost and Normal Profit.
Cost may be classified into private costs and social costs.
Private costs are the costs borne by an individual firm in producing a commodity.
Social costs are the cost of producing a commodity born by the society as a whole.
Cost is classified into fixed cost and variable cost.
Fixed costs do not change with a change in output.
Variable costs change with every change in output.
total cost is the sum of total fixed cost and total variable cost.
total cost changes with a change in output.
Changes in total cost are due to changes in variable cost only.
Average cost can be obtained by dividing total cost by quantity of output produced.
Average fixed cost equals total fixed cost divided by quantity of output.
Average variable cost can be obtained by dividing total variable cost by quantity of output.
Sum of average fixed cost and average variable cost is average total cost.
Marginal cost of producing output is the additional cost incurred on producing the last unit of output.
Marginal cost of producing output also equals the additional variable cost incurred on producing
the last unit of output.
What you have learnt :)
In Micro Economics, cost is the sum of (a) explicit cost (b) Implicit cost and (c)Normal profit.
It is different from cost used in business which includes only explicit cost.
Explicit cost is the list of imputs hired and purchased from the market. It is also called money cost.
Implicit cost is the cost of inputs which are owned and supplied by the entrepreneur himself in the
production of a commodity. It is equal to the opportunity cost of these inputs.
Normal profit is the minimum supply prices of the entrepreneur which he must get in order to remain
in the present business.
Private cost is the cost which a firm has to incur in the production of a commodity.
Social cost is the cost to the society as a whole for producing a commodity in the form of air-pollution
, water pollution and noise pollution etc
Fixed costs the cost which do not change with change in the level of output.
Variable costs are the cost that directly vary with changes in the level of output.
Total cost is the sum of total fied costs(TFC) and Total Variable cost(TVC).
Average fixed cost is the per unit fixed ost of the output produced. It goes on decreasing with the
increase in output.
Average variable cost(AVC) is the per unit variable cost of output produced.
Average total cost(ATC) is the sum of the AFC as AVC.
Marginal Cost(MC) is the addition to TC by the production of are addition unit of product.
Terminal exercise :)
What is implicit cost? How is it different from explicit cost?
What is explicit cost? Distinguish it from implicit cost?
Explain the concept of 'normal profit'. justify that it is an element of cost in micro economics.
Explain the various elements of cost in micro economics.
Differentiate between the concepts of cost as used in business and in micro economics?
Distinguish between fixed cost and variable cost with suitable examples.
Explain the relationship between output and average fixed cost.
Distinguish between AFC and AVC and describe how these are calculated.
Explain ther term marginal cost, show with the help of example how is it calculated.
Which cost, fixed or variable, determine marginal cost? give reasons.
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