Directtraceable costs and indirectuntraceable costs. Thus, the smc curve is also ushap ed, a s seen ab ove. Scarcity is the condition in which our wants are greater than our limited resources. The total cost concept is useful in breakeven analysis and finding out whether a firm is making profit or not. Some of the most important decisions pertaining to business often relate to the cost of production, instead of physical resources themselves. Opportunity cost refers to the loss of earnings due to opportunities foregone due to scarcity of resources. Total fixed costs tfc average fixed costs afc total variable costs tvc average variable cost avc total cost tc average total cost atc marginal cost. Managerial economics applies microeconomic theories and techniques to management decisions. These lecture notes were prepared by xingze wang, yinghsuan lin, and frederick jao specifically for mit opencourseware. In order to understand the cost function well, in this article, we will look at various cost concepts. Cost, in common usage, the monetary value of goods and services that producers and consumers purchase.
Cost cbse notes for class 12 micro economics learn cbse. Cost benefit analysis is the examination of a decision in terms of its consequences or costs and benefits. It is more limited in scope as compared to microeconomics. This section provides lecture notes from the course. Principles of production economics and cost concepts objectives to explain the production function, the law of diminishing returns and marginalism in simple language. The concept of business cost is similar to the accounting or actual cost. Business costs include all the expenses which are incurred in carrying out a business.
They consist of material extracted from chapters 5 and 6 of the book pricing communication networks. The shadow price of a good measures the net impact on social welfare of a unit increase in the supply of that good by the public sector. The average cost concept is significant for calculating the per unit profit. Cost analysis is all about the study of the behavior of cost with respect to various production criteria like the scale of operations, size of output, etc. A firm earns or makes economic profit only when besides covering various costs of operation, a firm is also able to earn more than its opportunity cost or its possible earnings under the. Macroeconomics deals with the performance, structure, and behavior of an economy as a whole.
Then, the opportunity cost of a quintal of wheat is the amount of output of potatoes given up. Because something is limited, we need to make decisions regarding how we use and allocate our resources. The accounting concept is a historical concept and records what has. Managerial economics is a discipline that combines economic theory with managerial practice. Cost curves or cost concepts in economics authorstream. Chapter 2 cost concepts and design economics cost business. The concept of opportunity cost occupies an important place in economic theory. Economics discusses the economic problems and economic activities and indicates proper solution to these problems. Concept of opportunity cost is closely related to the concept of economic profit or economic rent. Meaning of opportunity cost and its economic significance. Surveys by ferraro and taylor 2005 point to abysmal understandings of the concept of opportunity cost by us faculty, graduates and undergraduates. Cost function a cost function shows the functional relationship between output and cost of production. Units of output total cost average cost marginal cost shirts rs. Economies of scale definition, types, effects of economies.
The, short run average cost curve falls in the beginning, reaches a minimum and then begins to rise. The lecture notes are from one of the discussion sections for the course. Cost theory derives other cost measures, which can be useful for firms that are planning to scale production up or down. Hence, it is important for producers to understand cost analysis. Cost concept of accounting play accounting explanation. The marginal and incremental cost concepts are needed in deciding whether a firm needs to expand its production or not.
Let us discuss here some important concepts of the two categories. Basic economic concepts athens university of economics and. Different cost concepts an overview economics discussion. In the context of project evaluation a cost benefit test is a. It is defined as the cost that results from a one unit change in the production rate. Lets understand the general concept of costs for that. Marginal cost is an increase in total cost that results from a one unit increase in output. The amount of money that a producer receives in exchange for the sale proceeds is known as revenue. What is ppf in economics concept, assumptions, shifts. An understanding of economics isnt seen as being as vital as balancing a household budget or learning how to drive a car. It is used for analyzing the cost of a project in short and long run. Important questions for class 12 economics concept of cost. Cost of producing a good, in economics is the sum total of all the, a.
Cost it refers to the expenditure incurred by a producer on the factor as well as nonfactor inputs for a given amount of output of a commodity 2. Sometimes, basic concepts of economics are referred to as basic elements of economics. Want may be defined as an insatiable desire or need by human beings to own goods or services that give satisfaction. The concept was first developed by an austrian economist, wieser.
Ppf primarily represents a hypothetical boundary between the maximum combination of goods and services that an economy can produce with the available resources and technology. Jun 04, 2019 cost cbse notes for class 12 micro economics cbse notescbse notes micro economicsncert solutions micro economics introduction this chapter gives a detailed version of cost and its types, related numericals and the relationship between them. Analytical cost concepts used in economic analysis of business. Everything that helps satisfy a human need falls under this banner. Besides, how economic development of the country is achieved through the means of economic planning is also included in the subject matter of economics. One of the most important aspects of choice in economics is the idea that every choice has tradeoff what didnt you choose. Cost refers to the amount of expenditure incurred in acquiring some thing the expenditure incurred to produce an output or provide service thus the cost incurred in connection with raw material, labour, other heads constitute the overall cost of production a managerial economist must have a clear understanding of the different cost concepts for clear. The meaning and concept of revenue micro economics. The concept of opportunity cost is one of the most important ideas in economics. Marginal costs and marginal revenue are key concepts in mainstream economic thought. This field of knowledge is known as production economics and cost principles, and includes aspects such as the production function, the law of diminishing returns, marginalism and cost concepts and relations.
Theory of cost 7 opportunity costs the opportunity cost is the return expected from the second best use of the resources, which is foregone for availing the gains from the best use of the resources. Theory of production, in economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells its outputs or products it will produce, and how much of each kind of labour, raw material, fixed capital good, etc. Total cost it refers to the total cost of production. In the above case, the private cost for giga dye and chemicals limited is rs. The advantage arises due to the inverse relationship between perunit fixed cost and the quantity produced. Economies of scale refer to the cost advantage experienced by a firm when it increases its level of output. A variable cost varies with the amount produced, while a fixed cost.
Lecture notes principles of microeconomics economics. Since we are unable to have everything we desire, we must make choices on how we will use our resources. Mar, 2019 there are five basic principles of economics that explain the way our world handles money and decides which investments are worthwhile and which ones arent. Based on the theory of firm, these principles explain various cost concepts, output response to inputs and the use of inputsresources to maximize profits and or minimize costs. There is always a tradeoff involved in any decision you make. What that means is that in a world of scarcity, everything has an opportunity cost. It is all about the financial aspects of production.
We study some important concepts of costs, and traditional and modern theories of cost. Ordinarily, costs refer to the money expenses incurred by a firm in the production process. Thus, it is uncertain if the concept is adopted in practices by managers and executives. Direct traceable costs and indirectuntraceable costs.
Cost and costing techniques in managerial economics informatics. Basic economic concepts course notes costas courcoubetis abstract these notes are about basic concepts in economics that are needed in order to study issues of pricing information goods and telecommunication services. Economics also discuses about the value judgment of human actions and behavior. By cost of production is meant the total sum of money required for the production of a specific quantity of output.
Read this article to learn about the meaning and concept of revenue, micro economics. Marginal cost is the increase in total cost that results from increasing production by one unit of output. Cost concepts and design economics free download as powerpoint presentation. Further discussion investigates highprofile issues in the economic assessment of environmental affects and the economic effects on sectors linked to waterprojectimpacted sectors. To understand the process of price determination and the forces behind supply, we must understand the nature of costs. Graphically, the atc c urve is derived in the same way as the savc. Explain the concept of opportunity cost and explain why accounting profits and economic profits are not the same. Example of cost concepts y tfc tvc tc afc avc atc mc 10 30 48 65 81 96 108 116 120 117 1600 2000 2200 2600 3200 4000 5000 6200 7600 2000 2600 3000 3200 3600 4200 5000 6000 7200 8600 100 33. In order to begin our discussion of economics, we first need to understand 1 the concept of scarcity and 2 the two branches of study within economics. Here, costs include imputed value of the entrepreneurs own resources and services, as well as the salary of the ownermanager. The concept is based on the fundamental fact that factors of production are scarce and versatile. One implication is that the concept is poorly taught in textbooks and classrooms from. It is all of the payments or expenditures necessary to obtain the factors of production of land, labor, capital and management. Economics is the study of scarcity and choice scarcity means that there is a finite amount of a good or service basically they are limited.
Scarcity scarcity, a concept we already implicitly discussed in the introduction to this. The term cost is most widely used as the money cost of production which relates to the money expenditure of a firm on. Chapter 2 cost concepts and design economics free download as powerpoint presentation. Sep 30, 2019 under cost concept of accounting, an asset should be recorded on its cost in which it was purchased regardless of its market value e. When a firm starts producing goods, it has to pay the price for the factors employed for the production. Total fixed costs tfc average fixed costs afc total variable costs tvc average variable cost avc total cost tc average total cost atc marginal cost mc 4. To indicate how the most profitable production level optimum production can be achieved. The cost of loss to the environment caused by giga is estimated to be rs. The other notable contributors are daven port, knight, wicksteed and robbins. Cost curves or cost concepts in economics authorstream presentation. Production economics, thus provides a framework for decision making at the level of a firm for increasing efficiency and profits. Knowledge of and insight into these economic principles are important since. Economics module 3 cost and revenue producing goods and services 76 notes we can express the above example in the form of a table as follows.
Principles of production economics and cost concepts. In the context of project evaluation a cost benefit test is a simple decision rule. Cost it refers to the expenditure incurred by a producer on the factor as well as nonfactor inputs for a given amount of output of a commodity. Economics notes opportunity cost stephen palmer, james raftery the concept of opportunity cost is fundamental to the economists view of costs. Oct 09, 2016 concept of ppf in economics assumptions production possibility curve 2. Under this concept stability in prices of assets while recording is achieved.
In this way, managerial economics is considered as economics applied to problems of choice or alternatives and allocation of scarce resources by the firms. Economics is an idea which make a relationship between scarce means and unlimited wants. A list and definition of different types of economic costs fixed, variable, total, marginal, sunk, accounting, opportunity cost. Concept of ppf in economics assumptions production possibility curve 2. Therefore, the firm must know the perunit c ost or the average cost. The subtopics for each lecture are related to the chapters in the textbook. This is sum total of various business expenses of giga such as cost of raw material, salaries and wages overhead expenses and selling and distribution expenses.
In economics, variable costs and fixed costs are the two main costs a company has when producing goods and services. Pdf chapter 2 cost concepts and design economic khalil. Cost concepts and design economics marginal cost output. Since resources are scarce relative to needs,1 the use of resources in one way pre vents their use in other ways. Understanding the concept of logistics cost in manufacturing turun kauppakorkeakoulu turku school of economics isbn 9789522493828 turun kauppakorkeakoulu turku school of economics hannemari halinen b5 kansi s10. Basics of managerial economics cost analysis and estimation pathways to higher education 21 2 economies of scope concept exploiting economics of scope at q 15000, profit will be maximized at the following calculated. In economics, cost of production has a special meaning. Scribd is the worlds largest social reading and publishing site. What is ppf in economics concept, assumptions, shifts, ppf. The deficiencies of cost benefit analysis also emerge from these principles, and these issues are also observed in this article. In this chapter our concern is with some basic preliminary concepts. Opportunity cost is your second choicewhat you give up when you make a decision.
Production and costs important questions for class 12 economics concept of cost function. Dec 07, 2019 production and costs important questions for class 12 economics concept of cost function. Given that opportunity cost is widely believed to be fundamental to economic thinking, this empirical evidence raises important teaching and conceptual issues. However, economics has an impact on every moment of our lives because, at its heart, it is a study of choices and why and how we make them.
These types of cost do not directly affect the level of production but may vary with change in production facilities e. The opportunity cost of investing in a healthcare intervention is best measured. Economics, is fond of saying there is no such thing as a free lunch. It is very useful in long term cost calculations e. It is all of the payments or expenditures necessary to obtain the factors of. Marginal costs and marginal revenue are key concepts in mainstream economic. Basic concepts and principles as a novice, economics seems to be a dry social science that is laced with diagrams and statistics. This is related to the concept of opportunity cost. The kind of cost concept to be adopted in a particular. The greater the quantity of output produced, the lower the perunit fixed cost.