managerial economics cost ppt
TRANSCRIPT
Cost refers to the amount of expenditure incurred inacquiring some thing
The expenditure incurred to produce an output orprovide service
Thus the cost incurred in connection with rawmaterial, labour, other heads constitute the overall costof production
A managerial economist must have a clearunderstanding of the different cost concepts for clearbusiness thinking and proper application
Output is an important factor which influences thecost
Where
C= Cost
S= Size of Plant / Scale of operation
O= Output level
P= Prices of inputs
T= Technology
),,,( TPOSC
Opportunity Costs and Outlay CostExplicit and Implicit/ Imputed CostHistorical Cost and Replacement CostShort Run and Long run CostsOut of Pocket and Book CostsFixed Cost and Variable CostsPast and Future CostsTraceable Cost and Common CostsAvoidable Costs and Unavoidable CostsControllable Cost and Uncontrollable CostIncremental Cost and Suck CostsTotal, Average and Marginal CostsAccounting and Economic Costs
Opportunity Costs and Outlay Cost
Out lay costs, also known as actual costs or absolute costs.
These are the payments made for labour, material, plant,
transportation etc. All these are appearing in the books of
accounts.
Opportunity cost implies the earning foregone on the next best
alternative has the present option been undertaken
0pportunity cost is the cost of any activity measured in terms
of the value of the next best alternative forgone (that is not
chosen). It is the sacrifice related to the second best choice
available to someone, or group, who has picked among
several mutually exclusive choices.
Opportunity Costs and Outlay Cost
1. The cost of an alternative that must be forgone in order to
pursue a certain action. Put another way, the benefits you
could have received by taking an alternative action.
2. The difference in return between a chosen investment and
one that is necessarily passed up. Say you invest in a stock and
it returns a paltry 2% over the year. In placing your money in
the stock, you gave up the opportunity of another investment -
say, a risk-free government bond yielding 6%. In this
situation, your opportunity costs are 4% (6% - 2%).
The short-run defined as that period during which the physicalcapacity of the firm is fixed and the output can be increased onlyby using the existing capacity more intensively.
The cost concepts, generally used in the cost behaviour,are total cost, average cost and marginal cost.
TC(Total Cost):
Total cost is the actual money spends to produce aparticular quantity of output.
Total cost is the summation of fixed and variable costs
TC = TFC+ TVC
TFC(Total Fixed Cost):
Up to a certain level of production total fixed costs, i.e the costof plant, building, equipment etc. remain fixed.
TVC(Total Variable Cost):
But the total variable cost i.e the cost of labour, raw materialetc with the variation in output.
Average cost is the total cost per unit. It can be foundout as follows
Average Cost=
The average fixed cost keeps coming down as theproduction increases and the variable cost will remainconstant at any level of output.
AFC= AVC=
Marginal cost is the additional of product. It can bearrived by dividing the change in total cost by thechange in total output.
MC=
Q
TC
Q
TFC
Q
TVC
Q
TC
1 2 3
Q TFC TVC
0 60 -
1 60 20
2 60 63
3 60 48
4 60 67
5 60 90
6 60 132
4
TC
2+3
60
80
96
108
124
150
192
5
AVC
3/1
-
20
18
16
16
18
22
6
AFC
2/1
-
60
30
20
15
12
10
7
AC
4/1
-
80
48
36
31
30
32
8
MC
-
20
16
12
16
26
42
Q
TVC
Q
TFC
Q
TC
Q
TC
1 2 3 4
Q TFC TVC TC
2+3
0 60 - 60
1 60 20 80
2 60 63 96
3 60 48 108
4 60 67 124
5 60 90 150
6 60 132 192
5 6 7 8
AVC
3/1
AFC
2/1
AC
4/1
MC
- - - -
20 60 80 20
18 30 48 16
16 20 36 12
16 15 31 16
18 12 30 26
22 10 32 42
Long run is a period during which all inputs are variable
including the ones which are fixed in short run.
In the long run firm can change its output according to its
demand.
Over a long period, the size of the plant can be changed,
unwanted building can be sold or let out, and the number of
administrative and marketing staff can be increased or
reduced.
In the long run the firm has to bring or purchase larger
quantities of all in inputs.
In the long term all input factors are variable.
In the long run cost out-put relation therefore implies the
relationship between the total cost and the total output.
In the long run, a firm has a number of alternatives in
regard to the scale of operations.
In the long run average cost curve is composed of a series of
short-run average cost curves.
In the short run average cost (SAC) curve applies to only
one plant whereas the long-run average cost (LAC) curve
takes into consideration many plants.
The long run cost-output relationship is shown graphically
in the above with the help of LAC curve.
To draw an LAC curve we have to start with a number of
SAC curves.
In this figure it is assumed that technological there are only
three sizes of plants-small, medium and large, SAC1, for the
small size, SAC2 for the medium size and SAC3 for the large size
plant.
If the firm wants to produce OP units or less, it will choose the
smallest plant. For an output OQ, the firm will opt for medium
size plant.
It does not mean that the OQ production is not possible with
small plant. Rather it implies that cost of production will be
more with small plant compared to the medium plant.
For an output OR the firm will choose the largest plant as
the cost of production will be more with medium plant. Thus
the firm has a series of SAC curves.
The LAC drawn will be tangential to the entire families of
SAC curves i.e. the LAC curve touches each SAC curve at one
point, and thus it is known as Envelope Curve. And also
known as Planning Curve as it series as guide to an
entrepreneur in his planning to expand the production in
future.