BIJU P M PGT ECONOMICS KV 2 KOCHI

BIJU P M PGT ECONOMICS KV 2, KOCHI

COS COST OF PRODUCTION COST: COST OF PRODUCTION IS THE PAYMENT MADE TO THE FACTORS OF PRODUCTION WHICH ARE USED IN THE PRODUCTION OF A PARTICULAR COMMODITY. COST FUNCTION: The functional relationship between cost & output is called cost function. C = f(Q) Q= for unit of output 2

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Two types of costs 1. Explicit costs: (Short run costs) -The Actual Money expenditure which a firm must incur to make payments to the suppliers of factors such as wages to workers , rent to the landlords , interest on the borrowed funds used for the production of a good are called explicit costs. 2. Implicit Costs: (Long run costs) The imputed costs of self-owned factors which are employed by the entrepreneurs in his own business are called implicit costs. (owners salary) 6

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1. TOTAL COST The cost that a firm incurs to employ fixed input is called Total Fixed Cost and the cost that a firm incurs to employ variable input is called TVC. Addition of TVC and TFC is called Total Cost. TC = TVC+TFC 11

Behaviour of fixed Cost, VC& TC Curves Fixed cost (Rs. ) V. Cost (Rs. ) Total Cost (Rs. ) 0 10 10 20 2 10 18 28 3 10 24 34 4 10 28 38 5 10 32 42 6 10 38 48 TC VC TC, TVC, TFC Output (unit) FC output 12

4. AVERAGE FIXED COST TFC/Q

5. AVERAGE COST/Average total cost · Cost Incurred by a firm on per unit of production is known as Average Cost(AC) Unit TC AC 1 20 20 2 28 14 3 40 13. 3 4 55 13. 8 ------------------------ OR TC/Q 16 12 8 4 AC ------------------ 20 ----- AC AC = AFC + AVC --------- 1 2 3 4 5 Output 14

6. AVERAGE VARIABLE COST TVC/Q

7. MARGINAL COST · Marginal cost is a addition made to total cost or Total variable cost when one more unit of output is produced MC = TC/ X

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RELATIONSHIP BETWEEN AC & MC. Both AC & MC are derived form TC

Relationship Between Short Run Cost(Explicit Cost) OUTPUT TC (Units) TFC TVC AC OUTP AFC AVC MC UT TC TFC TVC AC (Units) 0 0 0 0. 00 0 40 40 0 0. 00 1 120 40 80 120. 00 40. 0 80 1 90 60 30 2 170 40 130 85. 00 20. 0 65. 0 50 2 105 60 3 180 40 140 60. 00 13. 3 46. 7 10 3 115 4 210 40 170 52. 50 10. 0 42. 5 30 4 5 260 40 220 52. 00 8. 0 44. 0 50 6 340 40 300 56. 67 6. 7 50. 0 7 440 40 400 62. 86 8 550 40 510 68. 75 AFC AVC MC 0 0 90. 00 60. 0 30. 0 15 45 52. 50 30. 0 22. 5 10 60 55 38. 33 20. 0 18. 3 5 120 60 60 30. 00 15 5 135 60 75 27. 00 12. 0 15. 0 25 80 6 160 60 100 26. 67 10. 0 16. 7 40 5. 7 57. 1 100 7 200 60 140 28. 57 8. 6 20. 0 60 5. 0 63. 8 110 8 260 60 200 32. 50 7. 5 25. 0 -260 TVC =EMC, TC =TFC+TVC, AFC =TFC/Q, MC= ∆TC/∆TQ AVC=TVC/Q, AC= AFC+AVC, 20

Numerical on Costs Q. 1. A firm’s of producing 2 units of a goods is Rs. 9 and its total cost schedule is given AVC and MC for each of given level of output. Output – 3 1 2 TC (Rs. ) 30 23 27 Solution ∑MC 2 x 9 TVC/Q ∆TC/∆TQ output TC TFC TVC AVC MC 1 23 18 5 5 5 2 27 18 9 4. 5 4 3 30 18 12 4 3 21

Numerical on Costs Q. 2. TFC of a firm is Rs. 12. Given below is the MC schedule. Calculate TC and AVC fo level of output. Output – 5 6 1 2 3 4 MC (Rs. ) 12 9 7 2 4 8 Solution ∑MC TVC/Q TFC + TVC output TFC MC TVC AVC TC 1 12 9 9 9 21 2 12 7 16 8 28 3 12 2 18 6 30 4 12 4 22 5. 5 34 5 12 8 30 6 42 6 12 12 42 7 54 22

Numerical on Costs Q. 3. Calculate TVC and total cost from the following cost schedule of a firm where fixed costs are Rs. 10 Output – 1 2 3 4 MC (Rs. ) 6 5 4 6 Solution ∑MC TFC + TVC output MC TVC TFC TC 1 6 6 10 16 2 5 11 10 21 3 4 15 10 25 4 6 21 10 31 23

Q. . Why there is a Gap between ATC ans AVC ? Whether this gap goes on decreasing with an incre Can ATC & AVC join each other at any level of output ? ANS Y MC ATC AVC o x 1. ATC is greater than AVC by the amount of AFC 2. The vertical difference between ATC and AVC goes on decreasing as more output is produc AFC declines as level of out increases 3. ATC and AVC curves never meet each other because AFC cannt fall to Zero i. e. it is always 24

BIJU P M PGT ECONOMICS KV 2, KOCHI