Fixed Costs ive of level of P el, royalties for 6 on per i jpment, furniture expenditure te erecta c ofan. Ee gh ee pene finance, costs OF ar aining ™ re, Seated the establishment costs: are also included in for optimal manage. COST CONCEPTS sei Knowledge regarding the cost functions is very ™ essential EF the short Fun al decisions to be taken by the firm os well ies fie! Goverurves, nile in the iene i sl ete and output ave based plications £0F it elopment and growth of the firm and investment policies sisideration of cost curves is essential snd forms the basis for entry @ rms in the industry. Pro! 7 maximizing rule is determined with the hel es, cost functions and Pp! juction func. ginal analysis at which MC = MR. The mall the market situatlone of the the behaviour of the fons. This rule is PoP’ costs are ais ould explain # economy and in all ur of the firms in the production There are seven costs, which explain the behavi of requisite products. coduction. These costs remain ino fixed costs as all the inputs Fixed costs remain the Invariant in the short run but in the long run there are ‘osts include cost items like taxes, insurance, cess, depreciation nel working in'the firm, can be varied. Fixed ¢ Sn machingry, implements, Tools buildings, salaries of perso’ x indirect costs, St costs and overhe {4 costs. The sum- ott tion of all these costs is called total fixed costs (TFC). TFC is @ horizontal straight line parallel to X-axis (Figure 4.1) y @ TFC % Fe 8 ‘Output ve Figure 4.1 Total fixed costs. Variable Costs Variable ots a per definition vary with the level of output These inch caw materials, a ur, Powe, repairs, maintenance charges of machinery, et ing costs, operating costs, direct costs, prime eae47 : tion of these costs d running costs. These are second phase costs. The summa| i ° oe iy total variable costs (TVC). Graphically TVC has inyerse ‘S’ shape (Figure 4.2), y, Tv 9 ‘Output x Figure 4.2 Total variable costs. Total Costs ‘These include total fixed costs as well as total variable costs. Its shape is similar to that of TVC (Figure 4.3). y Te z é TFC ° Output x Figure 4.3. Total costs. Average Variable Cost (AVC) Itis the amount spent on the(variablé inputs to produce an unit of output. Algebrai- cally it is expressed as Total variable costs _TVC Output Q When a small amount of output is produced, cost of variable input per unit of output becomes very high. This is to say in other words, that productivity of variable input increases when greater amounts are used in the production of the commodities due to economies of scale. This causes AVC to have ‘U’ shape when it is graphed. This is shown in the Figure 4.4. When it is ‘U’ shaped it becomes reciprocal of average Physical product curve. AVC=48 ‘Output jerage variable cost: el where APP is maximum. Ther, AVC rises again and become, Figure 44 AV revel at the output lev: ‘ater amount of output, ANC falls to minimum I m output. after due to production of Bre aical at certain level of maxim Average Fixed Cost (AFC) Ie is the cost of fixed resources or inputs required for producing one unit of outpy and it is given by the formula as cq = Total fixed costs = TEC ‘Output Q AFC curve is declining with the increased outp’ to its maximum output. this it is continuously falling up hyperbola (Figure 4)- y | g ' AFC co ‘Output X Figure 45 Average fixed cost. Average Total Cost or Average Cost (ATC or AC) When the total costs are divided by output, we get ATC (Figure 4.6). 7 ‘igure 4.6).49 Total costs TC _ TFC + TVC oo =9 Q ATC Cost ‘Output ; x Figure 4.6 Average total cost. Marginal Cost (MC) ‘As per the definition, it is the change in the total cost due to the change in. output. “Algebraically it is expressed as Change in total costs __ ATC | ATVC Change in output aq "ag pier that to compute MC, we can use TC or TVC because fixed costs cannot be The only component of change in TC is TVC. The specific shape of MC curve iS due to marginal product of the variable inputs. When MPP is maximum, MC is minimum. MC curve is declining when MPP curve is increasing; hence there is an inverse relationship between MPP and MC. When MPP is zero MC becomes vertical. MC curve intersects AVC and AC at their minimum points (Figure 4.7). Ne Coe Y prorty viet Mi oa ot atc, AVC Rome mae sS wee 8 Output x Figure 4.7 Average and marginal costs.