Meaning:
In general terms cost refers to an amount to be paid or given up for acquiring any resources or services. in economics, cost can be defined as monitory valuation of efforts, material resources, time and utility consumed, risk incurred in the production of goods and services. The cost concepts are of two types based on time.
Cost concepts under short run:
Short-run cost curves are those cost which is different from output, when fixed plant and capital remain constant.
- Total cost: Total cost is a total obligation incur by the firm in producing a given level of output. it is that total sum of fixed cost and variable cost. The sum of fixed costs and variable costs at any given level of production. Formula: Total Cost = Fixed Costs + Variable Costs
TC=TFC+TVC
- Total fixed cost: This cost do not change with the change in output or these are incurred in hiring the fixed factor of production these are also called as overhead cost and include rent, insurance, property tax ,invest on capital, invested etc. Costs that do not change with the level of output. The fixed cost remain constant irrespective of the volume of goods or services produced. Examples: Rent, salaries, insurance premiums.
TFC=TC-TVC
- Total variable cost: These cost are incurred on the employment of variable factors of production who’s amount can be altered in the short run these include wages of labor, employed, prices of raw material, fuels and power used etc. These are also called as prime cost or direct cost. As production increases, variable costs rises as production decreases, variable costs fall. Examples: Raw materials, direct labor, utility costs directly tied to production.
TVC=TC-TFC
- Average cost: Average cost is nothing but a total cost divided by the number of units produced, it is per unit cost of both fixed and variable factors of production. The cost per unit of output, calculated by dividing the total cost by the quantity of output. Formula: Average Cost = Total Cost / Quantity of Output
AC=total cost/number of units produced or quantity
AC=AFC+AVC
- Average fixed cost: It is the per unit cost of the fixed factor and its obtained by dividing the total fixed cost by the total units of output produced.
AFC= TFC/Q
- Average variable cost: It is the per unit cost of the variable factor and its obtained by dividing the total variable cost by the total unit of output produced.
AVC=TVC/Q
- Marginal cost: The addition made to the total cost by producing one more unit of output is called marginal cost. It is the change in total cost due to change in output. The additional cost incurred by producing one more unit of a good or service. Formula: Marginal Cost = Change in Total Cost / Change in Quantity of Output
MC=change in total cost/change in quantity
- Opportunity cost: the concept of opportunity cost occupies a very important place; the opportunity cost of any good is the next best alternative that is sacrificed. it arises because of the scarcity of resources and due to the alternative uses of scares resources. The cost of forgoing the next best alternative when making a decision. It represents the benefits that could have been gained by choosing the alternative option. Examples: If a business invests in new machinery, the opportunity cost is the interest it could have earned if the money were invested elsewhere.
Cost concepts under long-run:
Long-run cost curves represent the cost behavior of a firm over a period during which all inputs are variable, meaning that the firm can change the scale of production. Unlike short-run cost curves, which assume some inputs are fixed, long-run cost curves assume that the firm can adjust all factors of production, including plant size, labor, and capital.
- Long-Run Total Cost (LRTC): The minimum cost at which a firm can produce a given level of output when all inputs are variable. In the long run, firms can achieve different output levels by adjusting their scale of operations, which affects the total cost.
- Long-Run Average Cost (LRAC): The cost per unit of output when all inputs are variable, calculated by dividing the Long-Run Total Cost by the quantity of output. Formula: LRAC = LRTC / Quantity of Output. The shape of LRAC curve is typically U-shaped, reflecting economies and diseconomies of scale:
- Long-Run Marginal Cost (LRMC): The additional cost of producing one more unit of output when all inputs are variable. Formula: LRMC = Change in LRTC / Change in Quantity of Output
also read: explain the concepts of revenue.
