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    This document defines and provides examples of different types of costs that businesses incur, including: - Fixed costs that remain the same regardless of output level, such as rent and insurance. - Variable costs that change with output level, such as shipping and sales commissions. - Marginal cost as the cost of producing one additional unit. - Opportunity cost as the value of the next best alternative use of a resource. - Sunk costs that have already been incurred and cannot be recovered. It also distinguishes between explicit costs that are directly paid and implicit costs that are indirectly incurred. Formulas for calculating average total cost, average variable cost, and average fixed cost are provided.

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    This document defines and provides examples of different types of costs that businesses incur, including: - Fixed costs that remain the same regardless of output level, such as rent and insurance. - Variable costs that change with output level, such as shipping and sales commissions. - Marginal cost as the cost of producing one additional unit. - Opportunity cost as the value of the next best alternative use of a resource. - Sunk costs that have already been incurred and cannot be recovered. It also distinguishes between explicit costs that are directly paid and implicit costs that are indirectly incurred. Formulas for calculating average total cost, average variable cost, and average fixed cost are provided.

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    46 views14 pages

    Lecture of Farm Management

    Uploaded by

    A A
    This document defines and provides examples of different types of costs that businesses incur, including: - Fixed costs that remain the same regardless of output level, such as rent and insurance. - Variable costs that change with output level, such as shipping and sales commissions. - Marginal cost as the cost of producing one additional unit. - Opportunity cost as the value of the next best alternative use of a resource. - Sunk costs that have already been incurred and cannot be recovered. It also distinguishes between explicit costs that are directly paid and implicit costs that are indirectly incurred. Formulas for calculating average total cost, average variable cost, and average fixed cost are provided.

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    of 14

    Farm Management, Production &

    Resources Economics
    Cost
    ✓ Cost is the monetary value of goods and services.

    ✓ Itis the necessary expenditures that must be made in order to


    run any business.
    Types of Cost
     Fixed Cost (FC)
     Variable Costs (VC)
     Total Costs (TC)
     Marginal Costs
     Opportunity Cost
     Economic Cost
     Sunk Cost
     Avoidable Costs
     Explicit costs
     Implicit costs
    Fixed Cost
     The costs which don’t vary with changing output is called fixed
    cost.

     Even if your output changes or you don’t produce anything, your


    fixed costs stay the same.

     Examples
    ➢ Rent of factory

    ➢ Insurance and legal bills

    ➢ Monthly payroll
    Variable Cost
     The costs which vary with changing output is called variable
    cost.

     Examples
    ➢ Shipping charge

    ➢ Sales commissions

    ➢ Advertisements
    Marginal Costs
     Marginal cost is the cost of producing an extra unit.

     If the total cost of 3 units is 1550, and the total cost of 4 units is
    1900. The marginal cost of the 4th unit is 350.
    Opportunity Cost
     It means the value of the next-highest-valued alternative use of a
    resource.
    Economic Cost
     Economic cost includes both the actual direct costs plus the
    opportunity cost.

     For example, if you take time off work to a training scheme.

     You may lose a weeks pay of £350, plus also have to pay the
    direct cost of £200.

     Thus the total economic cost = £550.


    Sunk Cost
     These are costs that have been incurred and cannot be recouped.

     If you left the industry, you could not reclaim sunk costs.

     Example
    Avoidable or Escapable Cost
     These Costs can be avoided.
    Explicit costs
     These are costs that a firm directly pays for and can be seen on the
    accounting sheet.

     Explicit costs can be variable or fixed, just a clear amount.

     Examples
    ➢ Electricity bill
    ➢ Advertising in newspaper
    ➢ Employee wages
    ➢ Rent
    ➢ Insurance
    Implicit costs
     These are costs that a firm indirectly pays for and can not be seen
    on the accounting sheet.

     Examples
    ➢ Wages of self labor
    ➢ Rent for self owned premises
    Formulae
     ATC (Average Total Cost) = Total Cost / quantity
     AVC (Average Variable Cost) = Variable cost / quantity
     MC = Marginal cost.
     AFC (Average Fixed Cost) = Fixed cost / quantity
    Average cost curve

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