TYPES OF COST

COST FUNCTION
EXPLICIT COST
IMPLICIT COST
OPPORTUNITY COST
SHORT RUN COSTS
FIXED COSTS
VARIABLE COSTS
TOTAL COST
AVERAGE VARIABLE COST
AVERAGE COST
MARGINAL COST
 COST
Function
In economics, a cost function is a mathematical formula that expresses the relationship between the cost of a
product or service and the factors that influence it. These factors can include inputs such as labor, capital, and
materials, as well as external factors such as taxes, regulations, and market conditions.

The purpose of a cost function is to help businesses and policymakers make decisions about how to allocate
resources and set prices. By understanding how changes in inputs and external factors affect costs, businesses can
make more informed decisions about production and pricing strategies.

Cost functions can take many different forms, depending on the specific industry and the variables involved.
Common types of cost functions include linear, quadratic, and logarithmic functions, as well as more complex
models that incorporate multiple inputs and external factors.

Overall, cost functions are a crucial tool for understanding the economics of production and pricing, and are an
essential concept for students and professionals in the field of economics.
 Relation between AC & MC
In the field of economics, both AC and MC are important concepts that help in understanding the
behavior of firms in the market. AC, or average cost, refers to the total cost of production divided
by the quantity produced. On the other hand, MC, or marginal cost, refers to the additional cost
of producing one more unit of output.

The relationship between AC and MC is an important one. When AC is decreasing, MC is less than
AC. When AC is increasing, MC is greater than AC. This is because when AC is decreasing, it
means that the cost of producing each additional unit of output is decreasing. On the other hand,
when AC is increasing, it means that the cost of producing each additional unit of output is
increasing.

Moreover, it is important to note that MC intersects AC at the lowest point of the AC curve,
known as the minimum efficient scale. This point indicates the level of output where the firm is
producing at the lowest possible cost per unit. Beyond this point, the AC curve begins to increase
again as the firm experiences diminishing returns.

Overall, understanding the relationship between AC and MC is crucial for firms to make
informed decisions about their production levels and pricing strategies in the market.
 Relation between AVC & MC
The relationship between Average Variable Cost (AVC) and Marginal Cost (MC) is an important concept in
microeconomics. AVC is the average cost of producing each unit of output, while MC is the cost of
producing an additional unit of output.

AVC is calculated by dividing the total variable cost by the quantity of output produced. MC, on the other
hand, is calculated by dividing the change in total cost by the change in quantity of output.

The relationship between these two costs can be observed through their respective curves. The AVC curve
is U-shaped, as it initially decreases with an increase in output due to economies of scale, before
increasing again due to diminishing returns. The MC curve, on the other hand, is a U-shaped curve that
intersects the AVC curve at its lowest point.

When the MC is below the AVC, the AVC is decreasing. This means that the production of additional units
of output is costing less than the average cost of production. When the MC is above the AVC, the AVC is
increasing. This means that the production of additional units of output is costing more than the average
cost of production.

Understanding the relationship between AVC and MC can help businesses make informed decisions about
production levels and pricing strategies. By producing at the level where MC equals AVC, businesses can
optimize their production and reduce costs.
 Relation between TC & MC
The relationship between total cost (TC) and marginal cost (MC) is an important concept in
microeconomics. Total cost refers to the overall cost of producing a certain quantity of goods or
services, including both fixed costs (such as rent and salaries) and variable costs (such as raw
materials and energy). Marginal cost, on the other hand, refers to the additional cost of producing
one more unit of output.

Understanding the relationship between TC and MC is crucial for businesses that want to optimize
their production processes and maximize profits. In general, when marginal cost is less than total
cost, the business can increase production and reduce costs by producing more units. However,
when marginal cost exceeds total cost, the business should reduce production to avoid losing
money.

In addition to helping businesses make production decisions, the relationship between TC and MC
is also important for policymakers and economists studying market dynamics. By analyzing how
changes in marginal cost affect total cost, they can gain insights into how businesses operate and
how market conditions impact prices and output levels. Overall, the relationship between TC and
MC is a fundamental concept in microeconomics that plays a critical role in understanding how
businesses and markets work.
 Relation between TVC & MC
The relationship between TVC (Total Variable Cost) and MC (Marginal Cost) is crucial
in determining a company's profitability. TVC represents the total amount of costs
that vary with changes in production levels, while MC represents the additional cost
of producing one more unit of output.

As a company produces more units, the TVC increases because more resources are
required to meet the demand. The MC also increases because the cost of producing
each additional unit becomes higher due to the law of diminishing marginal returns.

Understanding the relationship between TVC and MC is essential for businesses to

make informed decisions about pricing, production levels, and resource allocation.
By analyzing these costs and their relationship, companies can optimize their
production processes and maximize their profits.
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Presented by: kohinoor bhagat
class: XI - F
ROLL NO: 20