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Cost Concepts

Cost Concepts

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Cost Concepts

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  1. Cost Concepts

  2. Types of costs • Actual Costs(acquisition or outlay)and Opportunity (alternative) costs • Sunk costs and outlay costs • Explicit cost(paid out) and implicit(imputed) cost • Incremental avoidable/escapable/differential) cost and sunk cost • Book costs and out of pocket costs • Accounting costs and Economic costs • Private costs and Social costs

  3. Types of costs • Direct costs and indirect costs • Controllable and non controllable costs • Replacement costs and original costs • Shutdown costs and abandonment costs • Private costs and social costs • Direct costs and indirect costs • Controllable costs and Non controllable costs

  4. Opportunity Cost • Opportunity Cost Concept • Opportunity cost is foregone value. • Reflects second-best use. • Explicit and Implicit Costs • Explicit costs are cash expenses. • Implicit costs are noncash expenses.

  5. Incremental and Sunk Costs in Decision Analysis • Incremental Cost • Incremental cost is the change in cost tied to a managerial decision. • Incremental cost can involve multiple units of output. • Marginal cost involves a single unit of output. • Sunk Cost • Irreversible expenses incurred previously. • Sunk costs are irrelevant to present decisions.

  6. Relationship between TC,AC & MC

  7. Fixed Cost, Variable cost and Marginal Cost

  8. Cost Output Function

  9. Cost output function Production and cost are interrelated. Cost function establishes the relationship between production and cost. Determinants of a cost function • Size of plant • Output level • Price of inputs • Technology • Managerial efficiency

  10. Short-run and Long-run Costs • How Is the Operating Period Defined? • At least one input is fixed in the short run. • All inputs are variable in the long run. • Fixed and Variable Costs • Fixed cost is a short-run concept. • All costs are variable in the long run.

  11. Short-run Cost Curves • Short-run Cost Categories • Total Cost = Fixed Cost + Variable Cost • For averages, ATC = AFC + AVC • Marginal Cost, MC = ∂TC/∂Q • Short-run Cost Relations • Short-run cost curves show minimum cost in a given production environment.

  12. Production and cost in the short run

  13. Short –Run Costs

  14. Relationship between MC and AVC • MC < AVC, the AVC declines. • MC=AVC, the AVC is at its minimum. • MC > AVC, the AVC is rising.

  15. The Average Cost curve is U shaped • The MC curve will intercept the AC curves at its minimum point. • When AC is decreasing, MC lies below AC - because when MC is below AC, producing an extra unit of output will pull down average costs. • When AC is increasing, MC lies above AC - because when MC is above AC, producing an extra unit of output will raise average costs. • Therefore MC will intercept the AC curve at its minimum point

  16. SAC curves for three plant sizes

  17. Long run Average cost curve (or) Envelope Curve

  18. Relation between long run and short run cost curves -Long Run Average and Marginal Cost curve

  19. Long-run Average Costs

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