Agrawal Institute

Economics

Cost
 Cost

Cost is the function of output i.e.

C = f (Q)
Economic Cost = Explicit Cost + Implicit Cost (including
normal profit)
Explicit Cost
These are the payments made by firm for production of goods. These
are easily traceable and are recorded in the books. Therefor, these are
also known as “Accounting Cost” eg. Rent, salary etc.

Implicit Cost
These are the cost of self owned factors of production. These are not
easily traceable and are not recorded in the books. Eg. Imputed Rent
etc.
 Cost Concepts

Total fixed Cost (TFC) :-

Eg: Rent, depreciation, interest, salaries of permanent staff,
telephone bill, electricity bill (minimum), insurance premium.
Output TFC
0 ₹ 100
1 ₹ 100 Shape
2 ₹ 100 Parallel
3 ₹ 100 to X - axis
4 ₹ 100
 Cost Concepts
Total Variable Cost (TVC) :-
Eg: Raw material, transportation, wages of casual labour,
electricity bill beyond minimum.
Output TVC
0 ₹0
1 ₹ 25
2 ₹ 40
3 ₹ 50 Shape
4 ₹ 55 Inverted
5 ₹ 70 S- Shaped
6 ₹ 90
7 ₹ 125
 Cost Concepts

Total Cost (TC) = TFC + TVC

Output TFC TVC TC = TFC + TVC
0 ₹ 100 ₹0 ₹ 100
1 ₹ 100 ₹ 25 ₹ 125
2 ₹ 100 ₹ 40 ₹ 140
3 ₹ 100 ₹ 50 ₹ 150 Shape
4 ₹ 100 ₹ 55 ₹ 155 Inverted
5 ₹ 100 ₹ 70 ₹ 170 S- Shaped
6 ₹ 100 ₹ 90 ₹ 190
7 ₹ 100 ₹ 125 ₹ 225
 Relation between TVC, TFC and TC

• At zero level of output TVC = 0 and TC = TFC.

• As the output increases TC also increases due to increase in
TVC.
• TC and TVC never intersect each other i.e. they are parallel
to each other because the difference between TC and TVC is
TFC which is always constant.
 Cost Concepts
𝑻𝑭𝑪
Average fixed Cost (AFC) =
𝑶𝒖𝒕𝒑𝒖𝒕

Output TFC AFC

0 ₹ 100 N/A
1 ₹ 100 ₹ 100 Shape
2 ₹ 100 ₹ 50 Rectangular
3 ₹ 100 ₹ 33.33 Hyperbola
4 ₹ 100 ₹ 25
 Cost Concepts
𝑻𝑽𝑪
Average Variable Cost (AVC) =
𝑶𝒖𝒕𝒑𝒖𝒕
Output TVC AVC
0 ₹0 N/A
1 ₹ 60 ₹ 60
2 ₹ 80 ₹ 40
3 ₹ 90 ₹ 30 Shape
4 ₹ 100 ₹ 25 U – Shaped
5 ₹ 145 ₹ 29
Curve
6 ₹ 210 ₹ 35
7 ₹ 385 ₹ 55
 Cost Concepts
𝑻𝑪
Average Cost (AC) = = AFC + AVC
𝑶𝒖𝒕𝒑𝒖𝒕
Output TC AC
0 ₹ 10 N/A
1 ₹ 18 ₹ 18
2 ₹ 24 ₹ 12
3 ₹ 28 ₹ 9.3 Shape
4 ₹ 36 ₹9 U – Shaped
5 ₹ 60 ₹ 12
Curve
 Cost Concepts
Marginal Cost (MC) :- It is the addition to the total cost (or
total variable cost) when one more unit of output is produced.

∆ 𝑻𝑽𝑪 ∆ 𝑻𝑪
MC = or
∆ 𝑶𝒖𝒕𝒑𝒖𝒕 ∆ 𝑶𝒖𝒕𝒑𝒖𝒕

Mc = 𝑻𝑽𝑪𝒏 − 𝑻𝑽𝑪𝒏−𝟏 or 𝑻𝑪𝒏 − 𝑻𝑪𝒏−𝟏 Shape

U – Shaped
• MC is slope of TVC Curve
• ∑MC = TVC
• Area under MC curve is TVC.
 Relation between AC & MC

• When MC < AC, then AC falls.

• When MC = AC, then AC is minimum.
• When MC > AC, then AC rises.
 Relation between MC & TC

• When MC is falling, TC increases at diminishing rate.

• When MC is minimum, TC stops increasing at diminishing
rate. (i.e. point of inflection)
• When MC is rising. TC increases at increasing rate.
 Relation between MC & TVC

• When MC is falling, TVC increases at diminishing rate.

• When MC is minimum, TVC stops increasing at
diminishing rate. (i.e. point of inflection)
• When MC is rising. TVC increases at increasing rate.
 Relation between AC, AVC & AFC
• As the output increases, AC curve declines because
AC = AVC + AFC and both AVC and AFC declines till output Q1.
• Between Q1 and Q2, AVC starts rising however AC is still
declining because rate of fall in AFC is greater then rate of rise in
AVC.
• After Q2, AC starts rising because rate of rise in AVC is greater
then rate of fall in AFC.
• AVC comes closer to AC but does not meet AC because difference
between them is AFC and AFC can never be zero.
Q1. Calculate TFC and TVC.
Output 0 1 2 3 4 5
TC (₹) 40 100 120 130 150 190
Q2. Calculate TFC and TVC.
Output 0 1 2 3 4 5 6 7
TC (₹) 50 70 85 110 150 195 240 280
Q4. Calculate TC, given that TFC at 0 level output is ₹ 60.
Output 0 1 2 3 4 5
TVC (₹) 0 16 22 29 42 48
Q9. Calculate TFC, TVC, AFC, AVC and MC.
Output 0 1 2 3 4 5 6
TC (₹) 120 150 170 186 200 220 270
Q11. Calculate TFC, TVC, AFC, AVC, AC and MC.
Output 0 1 2 3 4 5 6
TC (₹) 40 80 110 126 128 135 180
Q12. TFC = ₹ 20, calculate TVC and TC:-
Output 1 2 3
MC (₹) 10 15 25
Q17. A firm’s fixed cost is ₹ 400. Compute TC, TVC, AFC,
AVC and AC from the following table:

Output 1 2 3 4 5 6
MC (₹) 150 110 130 150 210 310
Q22. If TFC = ₹ 120, find out: TC, TVC and MC,
Output 1 2 3 4 5
TTC (₹) 240 160 140 160 180
Q26. Calculate AVC at each level of output.
Output 1 2 3 4
MC (₹) 40 30 35 39
Q29. Find out the missing figures from the given below:

Output TC (₹) AC (₹) MC (₹)

0 50 …. ….
1 …. …. 20
2 100 …. ….
3 …. …. 51
4 …. …. 56
5 …. …. 60
6 …. …. 70
 Q30. Find out the missing figures from the given below:
Output TFC (₹) TVC (₹) TC (₹) MC (₹) AFC (₹) AVC (₹) AC (₹)
1 10 50 …… …… …… …… ……
2 …… …… …… 30 …… …… ……
3 …… …… …… …… …… 40 ……
4 …… …… 270 …… …… …… ……
5 …… …… …… …… …… …… 70