costs
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Costs:
Chapter 7
Economic cost:
Explicit cost : the actual out of pocket expenditures incurred by the firm to purchase or hire the services of factors of production.
Implicit cost: the estimated values( in their best alternative employment) of the fa ctors owned by the firm and used in its own production processes.
Or the value of the working time of the firm’s owner and the value of other resources used but not purchased in a given period.
Economic cost or opportunity cost is the value of the best alternative use of resources.
Short run cost:
To make profit maximizing decision, a firm needs to know how its cost varies with output.
Cost = f (output)
Whereas
Output = f (input) A firm cannot vary some of its input, such as capital, in short run.
As a result , it is usually more costly for a firm to increase output in short run than in long run when input can varied.
To produce a given level of output in the short run, a firm incurs costs for both its fixed and variable inputs.
Short run cost: (total cost)
A firm’s fixed cost (F) is its production expense that does not vary with output
A variable cost (VC) is the production expense that changes with the quantity output produced.
The variable cost is of the variable inputs: the inputs the firm can adjust to alter its output level, such as labor materials.
A firm’s total cost is the sum of a firm’s variable cost and fixed cost
C= VC + F
Marginal curve ;
A firm’s marginal cost (MC) is the amount by which a firm's cost change if the firm produces one more unit of output.
MC= change in cost / change in output
Here only one variable is changing therefore;
MC = change in variable cost / change in output
Average Cost:
Average Fixed cost (AFC)
The fixed cost divided by the units of output produced
AFC= f/q
The fixed cost falls as output rises because the fixed cost is spread over more units.
Average Variable Cost (AVC)
The Variable cost divided by the units of output produced
AVC= VC/q
Because the variable cost increases with output, the AVC may either increase or decrease as output rises
Average Cost (AC) or Avg total cost: its sum of AVC and AFC
AC= AFC+ AVC
Variation Of SR cost with Output:
Output
Q
Fixed Cost
F
Variable cost
VC
Total cost
C
Marginal cost
MC
Average Fixed cost= F/q
Average Variable cost= VC/q
Average cost= c/q
0 48 0 48
1 48 25 73 25 48 25 73
2 48 46 94 21 24 23 47
3 48 66 114 20 16 22 38
4 48 82 130 16 12 20.5 32
5 48 100 148 18 9.6 20 29.6
6 48 120 168 20 8 20 28
7 48 141 189 21 6.9 20.1 27
8 48 168 216 27 6 21 27
9 48 198 246 30 5.3 22 27.3
10 48 230 278 32 4.8 23 27.8
11 48 272 320 42 4.4 24.7 29.1
F
Variable cost and Fixed cost Curve
FC and VC
0
50
100
150
200
250
300
0 2 4 6 8 10 12
output
FC
an
d V
C
FC
VC
Total cost, Variable cost and Fixed cost Curve
Total Cost
0
50
100
150
200
250
300
350
0 2 4 6 8 10 12
OUTPUT UNITS
FC A
ND
VC TC
FC
VC
Average Variable costC
ost
Quantity64
120
216
20
F
C VC
AVC
Cos
t pe
r un
it
Quantity
Total Cost
0
50
100
150
200
250
300
350
0 2 4 6 8 10 12
OUTPUT UNITS
FC AN
D VC
TC
FC
VC
AVC
0
5
10
15
20
25
30
0 2 4 6 8 10 12
output
AVc AVC
Average total costC
ost
Quantity64
120
216
20
F
C VC
AVC
Cos
t P
ER
U
NIT
Quantity
AFC
AC
AF, AV ,AC
010203040
50607080
0 2 4 6 8 10 12
output
AF,
AC
, AV AF
AV
AC
MC and AC
05
1015202530354045
0 2 4 6 8 10 12
output
MC
and
AF
MC
AC