Economic cost includes opportunity cost when analyzing economic decisions. An example of economic cost would be the cost of attending college.
The accounting cost includes all charges such as tuition, books, food, housing, and other expenditures. The opportunity cost includes the salary or wage the individual could be earning if he was employed during his college years instead of being in school. So, the economic cost of college is the accounting cost plus the opportunity cost. Economic cost takes into account costs attributed to the alternative chosen and costs specific to the forgone opportunity.
Before making economic decisions, there are a series of components of economic costs that a firm will take into consideration. These components include:. Privacy Policy. Skip to main content. Search for:. Production Cost. Types of Costs Variable costs change according to the quantity of goods produced; fixed costs are independent of the quantity of goods being produced.
Learning Objectives Differentiate fixed costs and variable costs. Key Takeaways Key Points Total cost is the sum of fixed and variable costs. Variable costs change according to the quantity of a good or service being produced. The amount of materials and labor that is needed for to make a good increases in direct proportion to the number of goods produced. Fixed costs are independent of the quality of goods or services produced. Fixed costs also referred to as overhead costs tend to be time related costs including salaries or monthly rental fees.
Fixed costs are only short term and do change over time. The long run is sufficient time of all short-run inputs that are fixed to become variable.
Key Terms fixed cost : Business expenses that are not dependent on the level of goods or services produced by the business. Average and Marginal Cost Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced.
Learning Objectives Distinguish between marginal and average costs. Key Takeaways Key Points The marginal cost is the cost of producing one more unit of a good. When the average cost declines, the marginal cost is less than the average cost. When the average cost increases, the marginal cost is greater than the average cost. When the average cost stays the same is at a minimum or maximum , the marginal cost equals the average cost.
Key Terms marginal cost : The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output. Additional cost associated with producing one more unit of output. Short Run and Long Run Costs Long run costs have no fixed factors of production, while short run costs have fixed factors and variables that impact production.
Learning Objectives Explain the differences between short and long run costs. Key Takeaways Key Points In the short run, there are both fixed and variable costs. In the long run, there are no fixed costs. Key Terms variable cost : A cost that changes with the change in volume of activity of an organization. Economies and Diseconomies of Scale Increasing, constant, and diminishing returns to scale describe how quickly output rises as inputs increase.
Learning Objectives Identify the three types of returns to scale and describe how they occur. Key Takeaways Key Points In economics, returns to scale describes what happens when the scale of production increases over the long run when all input levels are variable chosen by the firm.
Increasing returns to scale IRS refers to a production process where an increase in the number of units produced causes a decrease in the average cost of each unit. Constant returns to scale CRS refers to a production process where an increase in the number of units produced causes no change in the average cost of each unit.
Diminishing returns to scale DRS refers to production where the costs for production do not decrease as a result of increased production. Marginal decisions are very important in determining profit levels.
All curves are U-shaped, except the AFC curve. The AFC curve is downward sloping because the fixed costs are spread over output. As output increases, the AFC decreases. Marginal cost is a reflection of marginal product and diminishing returns.
When diminishing returns begin, the marginal cost will begin its rise. These costs will fall as long as the marginal cost is less than either average cost. As soon as the MC rises above the average, the average will begin to rise. Once again, you can think of the GPA example. Please use this practice problem to exercise the above relationship. A technological advance that increases productivity shifts the product curves upward and cost curves downward.
If a technological advance requires that more capital and less labor be used, at low levels of output the ATC curve shifts upward and at higher levels of output the ATC curve shifts downward. Total revenue TR is the price multiplied by the quantity sold. Total costs include both implicit and explicit costs. In another words: payments to owners Normal profit and non-owners for their resources are both included in the total cost.
Answer: Cost is the sum total of explicit cost, implicit cost and certain minimum profit normal profit. Answer: a The average fixed cost falls as more and more units of goods are produced. It is so because average fixed cost is equal to.
So, with constant total fixed cost and increasing output, the average fixed cost falls. The reason is that MC is confined to only one unit of the commodity produced whereas AC is related to all the units of commodity produced. As a result when MC increase, in case of MC, the whole increase is confined to the concerned one unit but in case of AC, this increase is shared by all the units of commodity produced.
As the result of, rising MC is unable to bring about an increase in AC. Answer: The total fixed cost will be the same at all the levels of output, ranging from zero to six.
For zero output, total cost is Rs Hence, Rs represents total fixed cost at all levels of output. Send your Feedback Do you have a suggestion or found some bug? Let us know in the field below. How was your experience?
Textbook Solutions. Briefly explain the concept of the cost function. What are total fixed cost, total variable cost and total cost of a firm? How are they related? What are the average fixed cost, average variable cost and average cost of a firm? Can there be some fixed cost in the long run?
What does the average fixed cost curve look like? Why does it look so? How does AFC behave as output is increased? Or What is the behaviour of average fixed cost as output increases?
What do the short run marginal cost, average variable cost and short run average cost curves look like? Give reason in support of your answer. Why is the short run marginal cost curve U- Shaped? The following table shows the total cost schedule of a firm. What is the total fixed cost schedule of this firm?
The total fixed cost of the firm is Rs. Give the meaning of cost. Or What is meant by cost in economics? Give two examples of fixed cost. Give two examples of variable costs. Why is average total cost greater than average variable cost?
What is meant by total cost? How does the total fixed cost change when output changes? Give the meaning of marginal cost. What does the area under marginal cost curve show? When AC curve slopes downwards, what will be the position of MC curve? Give two examples of explicit cost. Give two examples of implicit cost of a firm. What is the behaviour of Total Variable Cost, as output increases?
If it is given that the total variable cost for producing 15 units of output is Rs. Find the value of Marginal Cost. Exercise: Multiple Choice Questions. Which cost increases continuously with the increase in production? Total cost in the short run is classified into fixed costs and variable costs. Which one of the following is a variable cost?
In the short run, when the output of a firm increases, its average fixed cost:. Which one of the following statements is correct? Marginal cost is defined as:. Which one of the following statements is true to the relationship between marginal cost function and average cost function?
Which one of the following statements is true to the relationship among the average cost functions? Suppose output increases in the short run, than the Total cost will:. What will it be at 4 units of output? If marginal cost equals to average total cost,. When marginal costs are below average total costs,. If the average cost is falling,.
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