Cost

minimum amount or pront

expenditure and
a certain
indirect
Lost:- Cost means the sum of all the direct expenditures,

makes the payment

to outsiders. For example:
the expenditures for which firm
Direct expenditures-Itinclude It is also known as acounting
and recorded in the books of accounts.
It in outflow of cash
purchase of raw material. results

cost or explicit cost.

a doctor is running
owners. For example:
provided by the
the estimated values of inputs
Indirect expenditures:- It is but an
for running a clinic,
he is not paying any rent to himself rent
a clinic in his own house, now in this case obviously he expected to pay as
is
was taken on rent then what amount in outflow
i.e. If the similar space
estimated amountis calculated, indirect expenditures,
it doesp't results

Such estimated or imputed amount is known as

tor running such clinic.
or implicit cost.
It is also known as na@tional cost or non- accounting
of cash.
of given goods.and
do
continue the production
the producer must get to
Minimum Profits:-That amount of profit which.
known as normal profits.
It is also
to other goods.
not shift from the production of given goods
economic cost.
is called
cost and the normal profit
Economic cost:-The sum of explicit cost, implicit
of
remains same on every level
factors of production is knownas fixed cost.It

Fixed Cost:- Cost associated with fixed

Rent
output.For example:
variable cost. It varies with the level of

with variable factors of production is known as

associated
Variable cost :-Cost

Cost of raw material consumed.

output.For example:

Cost
Fixed Cost v/s Variable
Variable Cost
Fixed Cost
that cost which vary with the
level of
is
which remains fixed on every
1.It
1.It is that cost
It means that the level
of output
level of the output.
it remain
increases or decreases,
output either
output. level of
fixed.
2.It becomeszero on zero
2.Itisfound even on zerolevelofoutput.
is found in short run as well
3.It
asin long run.
is found only in
3.It short run.

fixed expenses and variable expenses) incurred by

the producer to
Total Cost:- It refers to the sum of expense (both
Total cost is the sum
of total variable cost and total fixed cost.
level of output.
produce a particular

TC= TVC+ TFC

Total Fixed Cost

of output.
by the producer to produce
level
Total fixed cost is the sum of fixed expenses incurred particular
(a)
the level of output.
cost remains constant at all
Total fixed
(b)
TFC
(c) Therefore,TFC curve is parallel
to X axis. TFC
It does not change with the level
of output.
(d)

Examples of fixed cost are rent, minimum telephone bill etc.

(e)
oupuk

1|Page Compiled by- Sikesh Sir(9230804234/8240623315)

TP
Unit
ncrease9 ith
CoSt of Paro ducing
increaging
the
siae cnd thesiefere pe
TVO Shone
Invense
Total VariableCost
level of output.
to produce a particular
Total varlable cost is the sum of variable expenses incurred by the producer

rate. Now, let us understand why

it increases with increasing
with rate and thereafter
of TVe.In
VC decides the nature
nitially increases decreasing
that
in short run i.e. Law of variable proportion
it took place. It is a behaviour of production factors and
of fixed specialisation
the variable due to proper utilisation
the beginning,
with the increase in factor(Labour),
TP increases with decreasin8
rateAfter a particular stage,
thus TVC increases with decreasing
output starts decreasing, with increasing
rate.
the output starts increasing, thus TVC increases
rate and therefore per unit cost of producing

Per unit labour cost Understanding

Units of Payment of Variable
cost
Factor
TP (Per unit variable
Variable

Factor (1 labour=100 per day) UnN Or Average Variable

Cost) T) with
(Labour) Here, the first stage TP is increasing

till
100 10 100/10-10 rate and therefore, per
unit variable
increasing
TVC is increasin8
200 25 200/25-8 cost starts decreasing.Indicating
rate.
300 40 300/40-7.5 with decreasing

400 60 400/60=6.6
TP is increasing
with decreasing rate and
70 500/70=7.1 variable cost starts increasing,
500 therefore, per unit

600 75 600/75-8
TVC is increasing with increasing rate.
indicating
the Average of any
with rate whereas if

of any item is increasing it means TOTAL is increasing increasing

Note:-If Average
rate.
item is decreasing
it means TOTAL is increasing with decreasing

TVC
TVC Identification phase of Law of
Output
variable proportion
10 First stage of law of variable
(TVC with
15 proportion increasing

18 decreasing rate
25 Second stage of law of variable

40 proportion (TVC) increasing

5
with Increasing rate

Derivation of TC curve from TVC and TFC curves

total cost is the vertical sum of TVC and TFC curves.

(a) Diagrammatically,

between TC and TVC is TFC and TFC remains constant at all levels of output, therefore TC curve is
(b) Difference

parallel to TVC
TC curve lies above the TVC curve because TC includes TFC as wel.
(c)

(d) TC curve doesn't starts from origin rather it starts from TFC level. This is because at zero level of output TC is equals

to TFC.

TFC remains constant at all the levels of exceeds TVC by the amount of TFC.
(e) Since, outputtherefore,TC always

Output TVC TFC TC

,TC
V
0 0 20 20 TC
1 LO 20 30

3
18
30
20
20
38
50
T TPC
4 0 20 70

oulpu
2| Page
Compiled by-Sikesh Sir(9230804234/8240623315)
 Average cost -It is the per unit cost of producing the output. For example: ifthe total cost of producing S0 unitsis
5000 then per unit cost is 5000/50=
Rs.

Average Cost =Total cost/Output

Rs. 100 per unit.
AC
OutputTotalcost Average cost
15 15
20 10
24 8 Guput
4 36 9
50 10

Average fixed cost:-

(a) It is per unit fixed cost of producing the output.

the of
(b) AFC continuously decreases with the increase in level of output because TFC remains constant at all levels

output.

(c) AFC curve never touch any of the axis because TFC can never be zero.

(d) AFC Curve is a rectangular hyperbola.

OutputTFC AFC
100
Rectanglas
100
2 Cost Hypetbola
100 50
100 33.3
AFC
100 25
oUHpu+
AFC curve is rectangular hyperbola because rectangular hyperbola indicates equal area of rectanglewhich are formed
with the help
of axis rectangular and hyperbola.Also, we can observe that taking output on X- axis and cost on Y-axis,the

area formed by the rectangles with axis will be TFC which remains constant at all levels of output.

Average Variable cost:- AVC is the per unit

variable
cost of
producing the output.

is This is in accordance with the law of variable proportion.In the beginning,with increase in the variable
AVC U- shaped.
factor due to proper
(labour), utilisation of fixed factors and TP increases with increasing rate and therefore
specialisation,
per unit cost of producing the output starts decreasing.

After a particular stage, TP increases with decreasing rate and therefore per unit cost of
producing the output starts

increasin8 AVC=TVC/Output

Output TVC AVC AVe

0 0
1 10 10
Cost
18 9
24 8
4 40 10
60 12

ouput
AC curve:- It refers to
per unit cost of output produced. AC curve is U-shaped because of
followingtwo reasons:

(a) AC is the sum of AVC and AFC.

(b) Law of variable proportion.

31Page
Compiled by- Sikesh
Sir(9230804234/8240623315)
AC is ihe sum of AVC and AFC AC
(a) Diagrammatically AC
AYC
is the vertical sumeif AVC and AFC.
(b) AFC continuously decreases with the
increase in level of output.
(C) AISO, AVC inítially decrease with the starts increasile
increase in the level of output but after a particular stage AVC
therefore,AVC becomes U-shaped.

(dThe difference between AC and AVC is AFC which continuously decreases with the increase in level of output
D
never becomes zero therefore, AC and AVC curves never touch each
other.
(e) AC curve lies above the AVC curve because it includes AFC as well.

(6) Therefore,AC curve is U-shaped.

AP AP
Laws of variable
proportion
UNy ot vasiinb
1e Fa c
AP increase
(a)

(b)
In

In
the first phase
the second phase
therefore,

AP is maximum therefore, AC is minimum.

AC decreases.

AC
AC
(c) In the third phase when AP starts falling AC starts increasing.
O
the change in total cost due to production of an additional output.
unit of
Marginal Cost (MC):-It refers to

Output
0
TFC
10
10
TVC

10
TC

10
20
MC

10
me
10 18 28 8 CoSt
3 10 25 35 7
4 10 40 50 15
10 60 70 20
10 90 100 30
ouhput

Relationship between MC and AC

meAC
(a) When both MC and AC falls,MC falls with the faster rate.
Cos
(b) When both MC and AC rises, MC rises with faster rate.

(c) MC curve cuts AC curve at its minimum point.

(d) There may be a situation when MC is rising but AC is falling

(e) MC curve remains left to AC curve.

oupu

Uwbob V F
M
CoSt

between MC and AVC

mCAVC
Relationship 1

(a) When both MC and AVC fall, MC falis with the faster rate.
(b)
(c)
When both MC and AVC rise, MC rises with faster rate.
MC curves cuts AVC curve aits minimum point.
Co
(d) There may be a situation when MC is rising and AVC is falling.

(e) MC curve remains left to AVC curve.

41 Page
Compiled by- Sikesh Sir(9230804234/8240623315)
 Wha Cauges 'U'shape oAC CUsve (Shovt S1On)
19 U-ghaped
FAS Jhe ShosHt Hun AC cusve
Due to Law ot Vasuieble paoporEiong
AC Palls due to the application of
law o
increasins
the Biced cnd voiable
Vasiiable
Ut+i ligation of
Lntially
Hetusns 1.e. due
Bacos
to

0) Then AC'eaches 1ta

bette

minimum pointi.e. the po int ob

Point
unit Cog
o ot
lowest Pes
ofthe 8i1m o
optimum capaciy 1A
Producton. due to aPplication law o of
e
Ac begingto sise due to ove-Utiljaa-ton
C) Tken
9etung Thig happens
diminjshing oves cHowding oß vas1iable Bae
the Bized facken and

sYatiab'e

MC
Due
curve 19 0-Ahaped
to laws o
etuin to a facker(Law of-
vasjable Paoprsion

curve Bal ls due to incrensing etuans (or

MC
Initally
co9s) becase ot bekey coosdinahon beween
decreosing
and Vaiable feeles.
Biac ed
due to aPPli caEion ot-law ol
MC may sema in Con8 tant
ietuang.
Constoant due to diminishing 9reurng (o1
MC Cwrve Sta4A 9AiSinge
o
degecie fachos tatio between
fncrea9ing cot), becouse
and Vaoiiabje6acter.
the ioced Pactos u9A

Cos
TA
TA
M
M
ATA AM
-urtpare