CHANDIGARH UNIVERSITY

BACHELOR OF BUSINESS ADMINISTRATION

MICRO ECONOMICS
BAT- 103

COST CURVES DISCOVER . LEARN . EMPOWER

 COST CURVES

Course Outcome
CO Title Level
Number
CO1 The student will be able to comprehend the Remember
dynamics of economy and its application in  
modern day business.
CO2 Understanding of the basic concepts of demand and Understand
supply forces in the real life situation.  
C03 Understanding the concepts of Pricing, Understand
Demand and Supply; Cost concepts,
different types of market structure etc. Source: https://slideplayer.com/slide/8351626/

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 DECISION TIME FRAMES

• The Short Run

– The short run is a time frame in which the quantity of one or more resources used in production is fixed.
– For most firms, the capital, is fixed in the short run.
– Other resources used by the firm (such as labor, raw materials, and energy) can be changed in the short run.
• The Long Run
– The long run is a time frame in which the quantities of all resources can be varied.
• Quick definition
• Short run – where one factor of production (e.g. capital) is fixed. This is a time period of fewer than six months.
• Long run – where all factors of production of a firm are variable (e.g. a firm can build a bigger factory) A time period of
greater than six months/one year
• Very long run – Where all factors of production are variable, and additional factors outside the control of firm can change,
e.g. technology, government policy. Several years.

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 Theories of Cost

Traditional Modern
Theories Theories

Short-Run long-Run Short-Run Long-Run

 TYPES OF COST CONCEPTS
 Total Fixed Costs (TFC)
 Total Variable Cost (TVC)
 Total Cost (TC=TFC+TVC)
 Average Fixed Costs (AFC)
 Average Variable Cost (AVC)
 Average Cost (AC=AFC+AVC)
 Marginal Cost (MC)

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 CONTD..
• Money Cost
• Real Cost
• Explicit & Implicit Cost
• Direct & Indirect Cost
• Replacement Cost
• Book Cost
• Opportunity Cost
• Sunk Cost
• Incremental Cost
• Controllable & Uncontrollable Cost

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 SHORT-RUN COSTS TO THE FIRM
• Total Costs
• The sum of total fixed costs and total
variable costs
• Fixed Costs
• Costs that do not vary with output
• Variable Costs
• Costs that vary with the rate of production
• TC=TFC+TVC

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 SHORT-RUN COSTS TO THE FIRM
• Average Total Costs (ATC)

Total costs (TC)

Average total costs (ATC) =
Output (Q)

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 SHORT-RUN COSTS TO THE FIRM
• Average Variable Costs (AVC)

Total variable costs (TVC)

Average variable costs (AVC) =
Output (Q)

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 SHORT-RUN COSTS TO THE FIRM
• Average Fixed Costs (AFC)

Total fixed costs (TFC)

Average fixed costs (AFC) =
Output (Q)

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 SHORT-RUN COSTS TO THE FIRM
• Marginal Cost
• The change in total costs due to a one-unit change in production rate

Change in total cost

Marginal costs (MC) =
Change in output

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LONG-RUN AVERAGE TOTAL COST TABLE
SHORT-RUN COSTS TO THE FIRM
Total Fixed Total Variable TC = FC +
Cost Cost VC AC = TC/Q
Quantity

0 40 0 40 0
1 40 20 60 60
2 40 30 70 35
3 40 32 72 24
4 40 34 74 18.5
5 40 36 76 15.2
6 40 38 78 13.0
7 40 40 80 11.4
8 40 46 86 10.7
9 40 48 88 9.8

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TYPICAL TOTAL COST CURVES

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AVERAGE AND MARGINAL
COST CURVES

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RELATION BETWEEN AC AND MC

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LONG RUN AVERAGE COST CURVES

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 MODERN COST CURVES

 Short-Run Cost Curves

 Long-Run Cost Curves
SHORT-RUN COST CURVES

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LONG RUN AVERAGE VARIABLE
COST CURVE

“Saucer-Shape

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RELATION BETWEEN SAC & SMC

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LONG –RUN AVERAGE COST CURVES

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LONG RUN MARGINAL
COST CURVES

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ASSESSMENT PATTERN

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 APPLICATIONS
 Helps to understand different types of cost.
 Helps to take decision regarding shut down and other important business decisions.
 Helps to calculate break even analysis.
 This classification of cost provides us better insight of the business conditions.
 It also helps in decision making.

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 REFERENCES

• D.N. Dwivedi, “Managerial Economic”, Vikas Publications, New Delhi.

• D. Salvatore, “Microeconomic Theory”, Tata McGraw Hill.
• D.M. Mithani, Managerial Economics Theory and Applications, Himalaya Publication, Bangalore.
• Mankiw Gregory N. (1998) : Principles of Economics, 3rd Edition, Thomson, 3rd Indian Reprint (2007).

• Pindyck, Robert S., Rubinfel : Micro-Economics, Prentice Hall of India, New Delhi.

• Daniel, L. and Gupta, P.L. (2006) 3. Maddala, G.S. and Miler Ellen : Micro-Economic Theory and Applications
THANK YOU