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    Cost Analysis

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    Manoj Nag
    Cost theory analyzes different types of costs including accounting costs, economic costs, variable costs, fixed costs, average costs, and marginal costs. Accounting costs include all expenses incurred during production while economic costs also include implicit opportunity costs. Variable costs change with output level while fixed costs do not. In the short-run, some costs are fixed and some are variable. In the long-run, all costs are variable as the firm can adjust all inputs. Cost curves like total cost, average cost, and marginal cost are used to analyze costs in both the short-run and long-run.

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    Cost Analysis

    Uploaded by

    Manoj Nag
    36 views20 pages
    Cost theory analyzes different types of costs including accounting costs, economic costs, variable costs, fixed costs, average costs, and marginal costs. Accounting costs include all expenses incurred during production while economic costs also include implicit opportunity costs. Variable costs change with output level while fixed costs do not. In the short-run, some costs are fixed and some are variable. In the long-run, all costs are variable as the firm can adjust all inputs. Cost curves like total cost, average cost, and marginal cost are used to analyze costs in both the short-run and long-run.

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    Cost theory analyzes different types of costs including accounting costs, economic costs, variable costs, fixed costs, average costs, and marginal costs. Accounting costs include all expenses incurred during production while economic costs also include implicit opportunity costs. Variable costs change with output level while fixed costs do not. In the short-run, some costs are fixed and some are variable. In the long-run, all costs are variable as the firm can adjust all inputs. Cost curves like total cost, average cost, and marginal cost are used to analyze costs in both the short-run and long-run.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    36 views20 pages

    Cost Analysis

    Uploaded by

    Manoj Nag
    Cost theory analyzes different types of costs including accounting costs, economic costs, variable costs, fixed costs, average costs, and marginal costs. Accounting costs include all expenses incurred during production while economic costs also include implicit opportunity costs. Variable costs change with output level while fixed costs do not. In the short-run, some costs are fixed and some are variable. In the long-run, all costs are variable as the firm can adjust all inputs. Cost curves like total cost, average cost, and marginal cost are used to analyze costs in both the short-run and long-run.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 20

    Cost Theory and Analysis

    What is Cost

     T h e expenditure incurred to produce an output
    or provide service

     T h u s the cost incurred in connection with raw


    material, labour, other heads constitute the overall
    cost of production
    Types of Cost

     A c c o u n t i n g Cost

     E c o n o m i c Cost

     V a r i a b l e Cost
    Accounting Cost

     A l l those expenses that incurred
    during production with adjusted
    depreciation is called accounting cost.
     C a s h payments which firms make for
    factorand non-factor input depreciation other
    book keeping entries.
    Economic Cost

     Economic costs includes the payments such as rent,
    wages, interest and profit, which are paid to factors of
    production – land, labour, capital and entrepreneur for
    their services.

     Economic = Accounting Costs + Implicit Costs


    Costs
    Opportunity Cost

     Factors of production or resources, in an economy are
    limited and have alternative uses. The cost of sacrifice or
    foregone for the next best use of resource is known as
    opportunity cost.

    Sunk Cost
     A cost that has already been incurred and thus canotbe
    recovered.
    Cost Function

     Short Run Cost
    Function

     Long Run Cost


    Function
    Cost Function
     Costs According to Time Period

    Short Run Cost Curve Long Run Cost Curve

    Total Cost Average Marginal Long Run Long Run Long Run
    (TC) Cost Cost (MC) Total Costs Average Marginal
    (AC) (LTC) Costs (LAC) Costs (LMC)

    Total Total Averag Averag [TC =TFC+TVC] [AC = AFC+AVC]


    Fixed Variabl e Fixed e
    Costs e Costs Variabl
    (TFC) Costs (AFC) e
    (TVC) Costs MC = TCn – TCn-1
    (AVC) Or
    MC = ΔTC
    ΔQ
    Short-Run Cost Functions

     In short-run period, some of the firm’s inputs are fixed and
    some are variable, and this leads to fixed and variable costs.
     Fixed Cost
     Variable Cost
     Total Cost
     Average Fixed Cost
     Average Variable Cost
     Average Total Cost
     Marginal Cost
    Short-Run Cost Functions

     Fixed Cost
    Fixed costs are those costs which do not change
    with the change in level of output.
     Variable Cost
    Variable costs are the costs which change with the
    change in level of output when output is zero, the variable
    cost also zero. It will increase with the increase in level of
    output. E.g. electricity changes, telephone charges.
    Short-Run Cost Functions

     Total Cost
    Total costs is the cost of all the productive
    resources used by the firm.
    TC = TFC + TVC
     Average Fixed Cost
    Average Fixed Cost, can be calculated by dividing
    total fixed cost with the level of output. As the level of output
    increases, the average fixed cost decreases.
     AFC = TFC
    Q
    Short-Run Cost Functions

     Average Variable Cost
    Average Variable Cost is the per unit cost of the variable
    factors of production. It can be calculated dividing total variable cost by
    output.
    AVC = TVC
    Q
     Average Total Cost
    Average cost is the total cost per unit. It can be found
    out as follows
    Short-Run Cost Functions

     Marginal Cost
    Marginal Cost is an addition made to total cost by
    the production of one more unit of output.

     MC = ∆TC
    ∆Q
    Short-Run Cost Functions
    Q TFC TVC AVC ATC MC
    TC
    0 $60 $0 $60 - - - -
    1 60 20 
    80 $60 $20 $80 $20
    2 60 30 AFC 30
    90 15 45 10
    3 60 45 105 20 15 35 15
    4 60 80 140 15 20 35 35
    5 60 135 195 12 27 39 55
    Average Total Cost = ATC = TC/Q
    Average Fixed Cost = AFC = TFC/Q
    Average Variable Cost = AVC = TVC/Q
    ATC = AFC + AVC

    Marginal Cost = TC/Q = TVC/Q


    Short-Run Cost Functions

    Long-Run Cost Curves

     I n long run all factors of production are


    changeable. In long run a firm can increase its
    capacity, equipment, machinery, land, employee,
    etc. in order increase output.
    Long-Run Cost Curves

     Long-Run Total Cost = The minimum total costs of
    producing various levels of output when the firm can
    build any desired scale of plant: LTC = f(Q)
    Long-Run Cost Curves

     Long-Run Average Cost = The minimum per-unit cost of
    producing any level of output when the firm can build any
    desire scale of plant: LAC = LTC/Q
     Long-Run Marginal Cost = The change in long-run
    totalcosts per unit change in output:
    LMC = LTC/Q
    Long-Run Cost Curves

    Long-Run Cost Curves
    The slope of the total
    revenue TR curve
    refers to the product
    price of $10 per unit.

     The vertical intercept


    of the total cost of (TC)
    curve refers TFC of
    $200, and the slope of
    the TC curve to the
    AVC of $5. The break-
    even with TR=TC
    $400 at the output (Q)
    of $40 units per time
    period at the point B.

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