COST ANALYSIS
COST CAN BE DEFINED AS A COMPENSATION, CASH OR KIND, MADE BY A
FIRM TO A FACTOR OF PRODUCTION FOR ITS CONTRIBUTION TO THE
PRODUCTION PROCESS.
CLASSIFICATION OF COST
1] OPPORTUNITY COST
2] MONEY COST & REAL COST
3] EXPLICIT COST & IMPLICIT COST
4] SUNK COST & FUTURE COST OR IRRELEVANT COST & RELEVANT COST
5] PRIVATE COST & SOCIAL COST
6] FIXED COST, VARIABLE COST & TOTAL COST
FIXED COST
IT IS THE COST INCURRED ON FIXED FACTORS. IN THE SHORT-RUN, THIS COST
REMAINS CONSTANT WHATEVER MAY BE THE LEVEL OF OUTPUT. IT IS THE SAME
EVEN WHEN OUTPUT IS ZERO. e.g. RENT OF THE PREMISES, SALARY OF THE
WATCHMAN etc.
VARIABLE COST
IT IS THE COST THAT DEPENDS ON THE VOLUME OF OUTPUT PRODUCED.
WHEN OUTPUT IS ZERO, VARIABLE COST IS ALSO ZERO e.g. COST OF
RAW-MATERIAL, ELECTRICITY, WAGES OF THE WORKERS OPPOINTED ON
PIECE-WAGE RATE etc.
TOTAL COST = TOTAL FIXED COST + TOTAL VARIABLE COST
OUTPUT
1
2
3
4
5
6
7
100
100
100
100
100
100
100
TFC
TVC
50
90
120
170
240
360
525
TC
150
190
220
270
340
460
625
OUTPUT
COST
O
TFC
TVC
TC
OUTPUT
COST
O
TFC
TVC
TC
TOTAL FIXED COST CURVE IS A
HORIZONTAL LINE. IT IS CONSTANT
WHATEVER MAY BE THE LEVEL OF OUTPUT.
TOTAL VARIABLE COST CURVE
IT INCREASES FIRST AT A DIMINISHING RATE
& THEN IT STARTS INCREASING AT
INCREASING RATE.
TOTAL COST CURVE LIKE TVC CURVE, IT RISES AT A DIMINISHING RATE
FIRST AND THEN AT AN INCREASING RATE.
THE VERTICAL DISTANCE BETWEEN TC CURVE & TVC CURVE IS CONSTANT,
AS IT REPRESENTS TFC
OUTPUT
1
2
3
4
5
6
7
100
100
100
100
100
100
100
TFC
TVC
50
90
120
170
240
360
525
TC
150
190
220
270
340
460
625
AFC AVC AC MC
100 50 150 150
50 45 95 40
33.3
25
40 73.3 30
42.5 67.5 50
20 48 68
70
16.6 60 76.6 120
14.3 75 89.3 165
O
OUTPUT
COST
AFC
AVC
AC
MC
O
OUTPUT
COST
AFC
AVC
AC
MC AFC CURVE
? IT CONTINUOUSLY APPROACHES X – AXIS
? IT NEVER MEETS X – AXIS.
AVC CURVE
? IT IS U - SHAPED
AC CURVE
? IT IS ALSO U – SHAPED
? AS IT MOVES FROM LEFT TO RIGHT, IT COMES CLOSER & CLOSER TO AVC CURVE
MC CURVE
? MC CURVE IS U – SHAPED
? IT CUTS AC CURVE AT ITS LOWEST POINT
doc_477815471.pptx
COST CAN BE DEFINED AS A COMPENSATION, CASH OR KIND, MADE BY A
FIRM TO A FACTOR OF PRODUCTION FOR ITS CONTRIBUTION TO THE
PRODUCTION PROCESS.
CLASSIFICATION OF COST
1] OPPORTUNITY COST
2] MONEY COST & REAL COST
3] EXPLICIT COST & IMPLICIT COST
4] SUNK COST & FUTURE COST OR IRRELEVANT COST & RELEVANT COST
5] PRIVATE COST & SOCIAL COST
6] FIXED COST, VARIABLE COST & TOTAL COST
FIXED COST
IT IS THE COST INCURRED ON FIXED FACTORS. IN THE SHORT-RUN, THIS COST
REMAINS CONSTANT WHATEVER MAY BE THE LEVEL OF OUTPUT. IT IS THE SAME
EVEN WHEN OUTPUT IS ZERO. e.g. RENT OF THE PREMISES, SALARY OF THE
WATCHMAN etc.
VARIABLE COST
IT IS THE COST THAT DEPENDS ON THE VOLUME OF OUTPUT PRODUCED.
WHEN OUTPUT IS ZERO, VARIABLE COST IS ALSO ZERO e.g. COST OF
RAW-MATERIAL, ELECTRICITY, WAGES OF THE WORKERS OPPOINTED ON
PIECE-WAGE RATE etc.
TOTAL COST = TOTAL FIXED COST + TOTAL VARIABLE COST
OUTPUT
1
2
3
4
5
6
7
100
100
100
100
100
100
100
TFC
TVC
50
90
120
170
240
360
525
TC
150
190
220
270
340
460
625
OUTPUT
COST
O
TFC
TVC
TC
OUTPUT
COST
O
TFC
TVC
TC
TOTAL FIXED COST CURVE IS A
HORIZONTAL LINE. IT IS CONSTANT
WHATEVER MAY BE THE LEVEL OF OUTPUT.
TOTAL VARIABLE COST CURVE
IT INCREASES FIRST AT A DIMINISHING RATE
& THEN IT STARTS INCREASING AT
INCREASING RATE.
TOTAL COST CURVE LIKE TVC CURVE, IT RISES AT A DIMINISHING RATE
FIRST AND THEN AT AN INCREASING RATE.
THE VERTICAL DISTANCE BETWEEN TC CURVE & TVC CURVE IS CONSTANT,
AS IT REPRESENTS TFC
OUTPUT
1
2
3
4
5
6
7
100
100
100
100
100
100
100
TFC
TVC
50
90
120
170
240
360
525
TC
150
190
220
270
340
460
625
AFC AVC AC MC
100 50 150 150
50 45 95 40
33.3
25
40 73.3 30
42.5 67.5 50
20 48 68
70
16.6 60 76.6 120
14.3 75 89.3 165
O
OUTPUT
COST
AFC
AVC
AC
MC
O
OUTPUT
COST
AFC
AVC
AC
MC AFC CURVE
? IT CONTINUOUSLY APPROACHES X – AXIS
? IT NEVER MEETS X – AXIS.
AVC CURVE
? IT IS U - SHAPED
AC CURVE
? IT IS ALSO U – SHAPED
? AS IT MOVES FROM LEFT TO RIGHT, IT COMES CLOSER & CLOSER TO AVC CURVE
MC CURVE
? MC CURVE IS U – SHAPED
? IT CUTS AC CURVE AT ITS LOWEST POINT
doc_477815471.pptx