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CA CPT Micro Economics PPT Theory of Cost
CA CPT Micro Economics PPT Theory of Cost
CA CPT Micro Economics PPT Theory of Cost
COST
COST ANALYSIS
Cost Analysis Refers to the Study of
Behavior of Cost in Relation to
Production
Economic costs
made to suppliers.
made to suppliers as
well as imputed
payments
Accounting Costs
Accounting Costs
It take care of all the payments and charges made
ECONOMIC COSTS
ECONOMIC COSTS
The economic cost include :
The normal returns on money capital invested by the
Economic costs
Explicit
Costs
Implicit
Costs
Economic
Costs
OR
Accounting
Costs
Implicit
Costs
Economic
Costs
It involves actual
expenditure of funds on
say wages, rent,
interest etc.
Outlay costs are
Opportunity Costs
cost of forgone
opportunity.
Opportunity Costs are
Opportunity Costs
It involves a
comparison
between the policy
that was chosen
and the policy that
was rejected.
Example: The
opportunity cost of
using capital is the
interest it can earn
in the next best use
of capital with equal
risk.
Types of Costs
Cost
Direct cost
(Traceable cost)
Indirect Cost
(Non-traceable cost)
Direct Cost
Cost that are readily identified and are traceable to a
Indirect Cost
Cost that are neither readily identified and are nor
Variable Costs
Fixed cost
Variable cost
Fixed Costs
Fixed Costs
These costs vary with the size of plant and are a
function of capacity.
Fixed costs do not vary with the volume of output
within a capacity level.
Fixed costs cannot be avoided.
They can be avoided only when operations are
completely closed down
Example: rent, property taxes, depreciation, interest
on loans etc.
Variable Costs
Costs that are a function of output in the production
period.
Variable costs vary directly and sometimes
proportionately with output.
Example: wages, raw material etc.
Cost function
It refers to the mathematical relation between cost of a
C = f (QX)
C = cost
f = function
(QX) = quantity produced
Time Period
Time Period
Short-run
Long-run
Short-run
It is a period of time in which output can be
Long-run
It is a period of time in which output can be
Short-run
It is a period of time in
remain unchanged.
Long-run
It is a period of time in
run.
Short-run
In short-run factors
are of two types
Fixed Factor
Variable Factor
Fixed Factor
Factors which cannot be
easily varied.
E.g.- machinery, building,
Variable Factor
Factors which can be
easily varied.
E.g.- workers, raw
Short run
costs
Short-run
Unit costs
Short-run
Total costs
TFC
TVC
TC
AFC
AVC
ATC
MC
TFC
Output
TVC
Output
Variable
component
production
Fixed
component
TVC
Variable cost
Output
TVC
TC
TFC
AFC = TFC/Q
AFC will slope downward nut never touches either of
axis.
AFC can not be zero.
cost
AFC
Output
AVC = TVC/Q
AVC first falls, then reaches a minimum and then
rises
It is a U-shaped curve.
cost
AVC
Output
cost
AVC
AFC
Output
cost
ATC
Output
cost
AVC
AFC
Output
minimum.
As, output increases AVC rises but AFC continues to
fall
Therefore AC rises
Due to the behavior of AFC & AVC the ATC curve is
U-shaped.
AFC
Cost
MC
Output
Marginal cost
(MC) curve is U
shaped.
Marginal cost
(MC) initially falls,
reaches to
minimum then
rises.
cost falls.
Then after due to diminishing returns, Marginal cost
rises.
Q1
Q2
TFC
TVC
TC
AFC
AVC
ATC
MC
20
20
20
30
50
20
30
50
30
20
45
65
10
22.50
32.50
15
20
55
75
6.67
18.33
25.00
10
20
75
95
5.00
18.75
23.75
20
20
110
130
4.00
22.00
26.00
35
20
165
185
3.33
27.50
30.83
55
output.
Long run cost is least possible cost of producing any
given level of output.
Long run TC
Long run AC
Long run MC
curves.
Suppose, we take three short run AC curves
Diagram
In the long run the firm will examine with which size of
Diagram
Upto OB
amount of
output, the
firm will
operate on
the SAC1
so the cost
can be
minimum.
Diagram
If the level
of output is
OA the firm
will produce
again on
SAC1 to
minimize
the cost
Diagram
If the firm
plan to
produce an
output
which is
larger than
OB but less
than OD.
Now, the
firm will
produce on
SAC2.
Diagram
The firm will
use SAC3
for output
larger than
OD.
Every point
on the longrun average
cost curve will
be a
tangency
point with
some short
run AC curve.
A) When the
LAC curve is
declining, it
is tangent to
the falling
portions of
the short run
cost curve.
When the
LAC curve
is rising, it
is tangent
to the rising
portions of
the short
run cost
curves.
Output at OQ level
The firm
operate it only
at the
minimum point
of LAC and
corresponding
to SAC.
to scale.
It is flattened U shaped curve.
Returns to Scale
Long run
AC curve
Planning
curve
Envelope
curve
Formulas
Formulas
TC
TFC
TVC
OR
TC
TFC
MC
TC
AC
TC
Formulae
TFC
TFC
TFC
TC
AFC
TVC
Formulae
TVC
TC
TVC
TFC
AVC
TVC
MC
Formulae
Formulae
Formulae
Formulae
a) Increases
b) Decreases
c) Remains constant
d) First declines and then rises
Ans. (b)
a) Production cost
b) Physical cost
c) Real cost
d) Opportunity cost
Ans. (d)
a) variable cost
b) fixed cost
c) opportunity cost
d) economic cost
Ans. (a)
a) When the average cost is rising ,the marginal cost must be rising
b) When the average cost is rising ,the marginal cost must be falling.
c) When the average cost is rising ,the marginal cost is above the
average cost.
d) When the average cost is falling, the marginal cost must be rising.
Ans. (c)
Ans. (C)
MCQs
12. Use the following data
Output
(O)
Total
cost
(TC)
Rs. 240
Rs. 330
Rs. 410
Rs. 480
Rs. 540
Rs. 610
Rs. 690
(a) 133
(b) 75
(c) 80
(d) 450
ans. (c)
a) 2 and 3
b) 3 and 4
c) 4 and 5
d) 5 and 6
ans. (c )
a) The Change in total cost due to a one unit change in out put .
b) Total cost divided by output.
c) The change in output due to a one unit change in an input.
(d) Total product divided by the quantity of input.
ans.(a)
a) Total cost
b) average cost
c) variable cost
d) Quantity of output
ans. (c)
Thank You