Economics Presentation 1

8/8/2019 Economics Presentation 1

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INTRODUCTION

The cost has various connotations .The

concept of cost most widely used in

economics is the one relating to the money

cost of production . Money spend upon various factors of

production in the form in wages and salaries ,

insurance and transport expenditure andother expenditure incurred in connection with

the production of the given level of out put .


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CONCEPT

Generally costs are classified into two

categories .They are

1. fixed cost (FC)

2. variable costs (VC)


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CONCEPTS OF

1. Total cost (TC)

2. Average cost (AC)

3. Marginal cost (MC)


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TOTAL COST :- cost incurred for all the factors

of production for a given level of out put in

termed as the total cost.Total cost is the sumof the fixed and variable costs in the short run

production process.

TC = FC + VC

AVERAGE COST :- average cost refers to the

cost of producing per unit of out put . It is

calculated by dividing the total cost by the

units of out put produced

AC = TC/Q


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MARGINAL COST :- marginal cost is the costof producing one additional unit of out put . It

is the net addition made to the total costs by

the production of one additional unit of output .

MCn = TC TCn-1


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Relationship between marginal cost andaverage cost

- When AC is falling, MC is also fallingand AC>MC i.e., When both MC and ACare falling, MC curve lies below the AC

curve- At certain stage MC starts rising butAC continues to fall, AC is still abovethe MC.

- When AC is minimum, MC=AC i.e., MCintersects AC at its lowest point.

- When both Ac & MC are rising, MC>AC

i.e., AC curve lies below MC


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Relation Between MC and AC


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COSTS IN THE SHORT RUN AND IN

THE LONG RUN

For many firms, the division of total costs

between fixed and variable costs depends on

the time horizon being considered.

In the short run, some costs are fixed.

In the long run, fixed costs become variable costs.


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Short run average cost schedule of a

firmNo. of

units

TFC TVC TC AFC AVC ATC MC

0 100 0 100 - - - -

1 100 25 125 100 25 125 25

2 100 40 140 50 20 70 15

3 100 50 150 33.3 16.6 50 10

4 100 60 160 25 15 40 10

5 100 80 180 20 16 36 20

6 100 110 210 16.3 18.3 35 30

7 100 150 250 14.2 21.4 35.7 40

8 100 300 400 12.5 37.5 50 150

9 100 500 600 11.1 55.6 66.7 200

10 100 900 1000 10 90 100 400


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This entire concept of equilibrium at

profit maximizing level is guided by certain

assumptions .T

hese are1. The entrepreneur is rational and aims at

earning the higest possible profits .

2 . For simplicity sake it is assumed that the

firm is producing only one commodity

3. The entrepreneur is aware of the position

where the profits are maximum


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TOTAL REVENUE AND TOTAL COST APPROACH

profit is the difference between total

revenue and total cost . The point where thedifference of total revenue and total cost is

maximum , the profit is maximum .

To determine maximum profit by thetotal revenue / total cost approach what need

is to be evaluated is the point

where the distance between the total

revenue and the total cost is maximum for a

given of out put .


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MARGINAL REVENUE AND MARGINAL COST

APPROACH

To determine maximization of profit throughthe marginal concept

In this case the firm is said to be maximizingmore profits at that level of output where the

marginal revenue is just equal the marginal

cost


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POINT OF EQUILLIBRIUM FOR A SALES

MAXIMISING FIRM

profits form a very narrow perspective of anybusiness unit , sometimes their objectives are

in terms of maximizing market shares or sales

This does not mean that they dont earn

profits , they do earn at acceptable levels .

Given the revenue schedule of a firm sales are

maximized at that level of output

where the total revenue is maximum


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Economics Presentation 1

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