Cost Curve
Cost Curve
Cost Curve
INTRODUCTION
DEFINITION: Cost may be defined as a sacrifice or
foregoing which has already occurred or has potential
to occur in future with an objective to achieve a
specific purpose measured in monetary terms.
Cost results in current or future decrease in cash or
other assets, or a current or future increase in liability.
Determinants of Cost:
o Price of inputs
o Productivity of inputs
o Technology
o Level of Output
TYPES OF COSTS
1. ACCOUNTING COSTS: An accounting cost is recorded in the ledgers of a
business, so the cost appears in an entity's financial statements.
Examples:
Cost of raw materials
Wages and Salary
Interest on Loan
2. REAL COSTS: Real costs are more or less social and psychological in nature and
non-quantifiable in money terms. The modern concept of compensation packages is
strongly driven by the real cost component of total cost, as besides normal salary
employers try to compensate for leisure, social and family needs, etc.
3. IMPLICIT COSTS: These are the costs that do not involve actual payment or cash
outflowor reduction in the assets.
These arise when a firm makes use of its own resources which include :
Own Building
Costs of self - owned or self - employed resources
Own Land
4. OPPORTUNITY COSTS:
Opportunity cost is the benefit forgone from the next best
alternative that is not selected.
Individuals or firms give up an opportunity to use or enjoy
something in order to select something else.
For example: In case of choices: you may be working in
your hometown and suppose you have got another job
opportunity in a city far away from your hometown. Now if
you select the new job, you would be forgoing the benefits of
staying at home. This would be your opportunity cost of the
new job.
5. EXPLICIT COSTS:
Also known as out of pocket costs or accounting costs.
These are the costs that are entered in the Trading and Profit
and Loss Account.
For Example: Interest on Loan, Office expenses, Salaries, etc
6. SOCIAL COSTS: Social costs of the firms are those that society in
general has to bear because of the firm’s activities.
For Example: Pollution caused by industrial wastes and emissions.
It has 2 components: A) Private costs of the firm, B) Social costs paid
by the society.
7. SUNK COSTS: A sunk cost is a cost that has already been incurred
and cannot be recovered.
For Example: A) Your rent, marketing campaign expenses or money
spent on new equipment can be considered sunk costs.
B) Cost incurred in constructing a Factory.
I. SHORT
RUN
3.
1. TOTAL 2. AVERAGE
MARGINAL
COST COST
COST
II. LONG
RUN
3.
1. Total 2. Average
Marginal
Cost Cost
Cost
SHORT RUN COST FUNCTION
In the short-run, the firm cannot change or modify fixed
factors such as plant, equipment and scale of its organization.
In this the output can be increased or decreased by changing
the variable inputs like labor, raw materials, etc.