COSTS

It is the expenses incurred by the producer to produce goods and services.

What is Cost ?

Examples of Costs

Wages

Rent

Intereston loans

Insurance Premium

Electricity charges

Cost of Raw materials

TransportationWear a

nd

tear

Short Run Costs

Total Fixed Cost (TFC)

Total Variable Cost (TVC)

Total Cost (TC)

Total Fixed Cost

Total cost is the cost incurred by the producer for the purchase of fixed inputs. Fixed costs do not change with the changes in output

Examples of Fixed costs

● Rent for land and buildings

● Salary of permanent staff

● Interest on loans

● Insurance premium, etc.....

Total Variable Cost

● Total expenses incurred by the producer on variable inputs

● These costs change as the quantity changes

Examples of Variable Costs

● Cost of raw materials

● Energy Cost

● Transportation Cost

● Salary of temporary employees, etc......

TC= TFC + TVC

Total Cost

● It is the sum total of al l costs incurred by the producer to produce goods and services

● It is the sum of Total Fixed Costs and Total Variable Costs

Cost Schedule

Quantity TFC TVC TC0 20 0 20

1 20 10 30

2 20 19 39

3 20 27 47

4 20 34 54

5 20 40 60

6 20 45 65

7 20 49 69

8 20 54 74

9 20 60 80

10 20 67 87

11 20 75 95

12 20 84 104

Shape of Cost Curves

Calculate TFC and TVC

Quantity TC TFC TVC

0 50 ? ?

1 60 ? ?

2 70 ? ?

3 80 ? ?

4 110 ? ?

5 150 ? ?

6 200 ? ?

Can you draw the TC,TFC and TVC Curves ?

Average Variable Cost

● Variable Cost per unit of output

● Divide TVC by number of units of output

● AVC = TVC/q

● TVC = q x AVC

AVC

AVC

CV

O Q Output

Average Fixed Cost

● Fixed Cost per unit of output

● Divide the TFC by the number of units of output

● AFC = TFC / q

● TFC = q x AFCAFC

F

AFC

A

O QProduct

Short run Average Cost

● Cost per unit of output in the shortrun

● DivideTotal Cost by number of units of output

● SAC = TC / q

● Tc = q x SAC

SAC

SAC

CA

O Q Output

Short run Marginal Cost

● It is the addition to Total Cost due to the production of an extra unit of output.

● SMC = TC/ q∆ ∆

or

● SMC = Tcn-Tcn-1

SMCSMC

O

Costs(at a glance)

●

TC = TFC + TVC or TC = AC x q

TFC = TC TVC or TFC = AFC x q

–

TVC = TC TFC or TVC = AVC x q

–AC = TC/q or AC = AFC + AVC

AFC = TFC/q or AFC = AC AVC–

AVC = TVC/q or AVC = AC AFC–

SMC = TC/ q or Mc

∆∆

n = Tc n

-Tc n-1

Complete the Table

q TFC TVC TC AFC AVC SAC SMC

0 60 0

1 30

2 100

3 20 15

4 28

5 45