Cost concept in economics
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Cost Concepts in
Economics
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Cost Classification
Fixed or variable Cash or non-cash Accounting expense or not Opportunity costs
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Opportunity Costs
Not an accounting expense Every input has an alternative use OC is the value of a product not
produced because input was used for another purpose
OC is income that would have been received if input had not been used in its most profitable alternative use
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Short-run and Long-run Costs
Short-run = time period when one or more inputs are fixed
Long-run = time period when all inputs can be changed (none are fixed)
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Fixed Costs
Costs associated with owning a fixed input or resource
Do not change as level of production changes
Incurred even if no input is used Not under control of the manager in the
short-run Present in the short-run only
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DIRTI 5
Depreciation =lifeUseful
valueSalvageCost
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DIRTI 5
Depreciation =
Interest =
lifeUseful
valueSalvageCost
rateInterestvalueSalvageCost
2
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DIRTI 5
Depreciation =
Interest =
Repairs Taxes Insurance
lifeUseful
valueSalvageCost
rateInterestvalueSalvageCost
2
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DITI 4
Depreciation =
Interest =
Taxes Insurance
lifeUseful
valueSalvageCost
rateInterestvalueSalvageCost
2
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Example of Fixed Costs
Purchase a pickup for R20,000 Salvage value of R5,000 Useful life of 5 years Interest rate of 10% Taxes are R25 / year Insurance is R1,000 / year
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Variable Costs
Those costs that the manager has control over in a given period of time
Can be increased or decreased at the manager’s discretion
Feed, seeds, fertilizer, etc
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Total and Average Costs Total costs = TVC + TFC Average Variable Costs (AVC)
= TVC / Output level Average Fixed Costs (AFC)
= TFC / Output level Average Total Costs (ATC)
= TC / Output level
= AVC + AFC
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Marginal Costs
Cost associated with a change in the output
What did it cost for the last unit of increased output?
MC = Output
TC
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Typical Total Cost Curves
TVC
TC
TFC
Output
R
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Average and MarginalCost Curves
Output
RMC ATC
AVC
AFC
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Stocking Rate Problem TFC = R4000VC = R395 / steer Selling price = R70 / cwt
Runs Outputcwt APP MPP TFC TVC TC AFC AVC ATC MC MR
0 0 4,000 0 4,00054.9 70
10 72 7.2 7.2 4,000 3,950 7,950 55.6 54.9 110.452.0 70
20 148 7.4 7.6 4,000 7,900 11,900 27.0 53.4 80.451.3 70
30 225 7.5 7.7 4,000 11,850 15,850 17.8 52.7 70.456.4 70
40 295 7.4 7.0 4,000 15,800 19,800 13.6 53.6 67.160.8 70
50 360 7.2 6.5 4,000 19,750 23,750 11.1 54.9 66.065.8 70
60 420 7.0 6.0 4,000 23,700 27,700 9.5 56.4 66.071.8 70
70 475 6.8 5.5 4,000 27,650 31,650 8.4 58.2 66.679.0 70
80 525 6.6 5.0 4,000 31,600 35,600 7.6 60.2 67.887.8 70
90 570 6.3 4.5 4,000 35,550 39,550 7.0 62.4 69.498.8 70
100 610 6.1 4.0 4,000 39,500 43,500 6.6 64.8 71.3
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Stocking Rate Problem TFC = R4000VC = R395 / Run Selling price = R70 / cwt
Runs Outputcwt APP MPP TFC TVC TC AFC AVC ATC MC MR
0 0 4,000 0 4,00054.9 70
10 72 7.2 7.2 4,000 3,950 7,950 55.6 54.9 110.452.0 70
20 148 7.4 7.6 4,000 7,900 11,900 27.0 53.4 80.451.3 70
30 225 7.5 7.7 4,000 11,850 15,850 17.8 52.7 70.456.4 70
40 295 7.4 7.0 4,000 15,800 19,800 13.6 53.6 67.160.8 70
50 360 7.2 6.5 4,000 19,750 23,750 11.1 54.9 66.065.8 70
60 420 7.0 6.0 4,000 23,700 27,700 9.5 56.4 66.071.8 70
70 475 6.8 5.5 4,000 27,650 31,650 8.4 58.2 66.679.0 70
80 525 6.6 5.0 4,000 31,600 35,600 7.6 60.2 67.887.8 70
90 570 6.3 4.5 4,000 35,550 39,550 7.0 62.4 69.498.8 70
100 610 6.1 4.0 4,000 39,500 43,500 6.6 64.8 71.3
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Production Rules
Short-run SP > ATC
Produce where MR=MC
ATC > SP > AVC Making contribution to FC Produce where MR=MC
SP < AVC Do not produce
Long-run SP > ATC
Produce where MR=MC
SP < ATC Do not produce
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Cost Concepts in EconomicsSummary
Cost Classification Opportunity costs Fixed, Variable, and Marginal costs
DITI 4 Average total, fixed, and variable costs Marginal costs
Cost Curves Production rules
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Cost Concepts in Economics
E N D
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