1

Coaching for CS in Ludhiana

Contact : 7837-220-750studease.in

2

Cost Concepts in

Economics

3

Cost Classification

Fixed or variable Cash or non-cash Accounting expense or not Opportunity costs

4

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

5

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)

6

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

7

DIRTI 5

Depreciation =lifeUseful

valueSalvageCost

8

DIRTI 5

Depreciation =

Interest =

lifeUseful

valueSalvageCost

rateInterestvalueSalvageCost

2

9

DIRTI 5

Depreciation =

Interest =

Repairs Taxes Insurance

lifeUseful

valueSalvageCost

rateInterestvalueSalvageCost

2

10

DITI 4

Depreciation =

Interest =

Taxes Insurance

lifeUseful

valueSalvageCost

rateInterestvalueSalvageCost

2

11

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

12

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

13

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

14

Marginal Costs

Cost associated with a change in the output

What did it cost for the last unit of increased output?

MC = Output

TC

15

Typical Total Cost Curves

TVC

TC

TFC

Output

R

16

Average and MarginalCost Curves

Output

RMC ATC

AVC

AFC

17

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

18

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

19

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

20

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

21

Cost Concepts in Economics

E N D

22