INTRODUCTION

 Presented by:
 Faizan Raza
 SHEHZAD ARIF

 Topic Name:
COST OF PRODUCTION
 Presented to :
Sir MAZHER JAVED
 PRODUCTION

 Production exchange and consumption of goods and

services are among the basic economic activities of life.

 A producer or a firm acquires different inputs like labour,

machine, land, raw-material etc. Combining these inputs, it
produces output. This called the process of production.
  FACTORS OF PRODUCTION

Land

Labor

Capital

Management
  FUCTION OF PRODUCTION

Total product

Average product

Marginal product
  Cost Analysis:-

The economic cost that a firm incurs in the

production of a good refers to the payment it must to
all the resources (factors of production) employed by
it in the production of that good.

 The normal return on money capital invested by the

entrepreneur him self in his own business which he could
have earned if invested outside. The cost of production of a
firm changes with the changes in the output.
 Types of cost

Sunk cost :- 

A sunk cost is an expenditure that has been
incurred and cannot be recovered. All past costs are regarded
as sunk cost. Sunk cost does not vary with the changes in the
business activity for future it is unavoidable cost.
Future cost :-
Future cost is based on forecast it is relevant
for most managerial decisions. Future cost may need
expenditure on fixed on variable factors.
 TYPES OF COST

  Indirect cost :-
Cost which not directly affect to the production or any
individual final product.
 Money cost:-
When production cost is expressed in terms of monetary unit
it is called money cost.
 Real cost :-
The exertions of all the different kinds of labour that are
directly or indirectly involved in making it together required, for saving
the capital used in making it, all these sacrifices together will be called the
real cost of production of a commodity.
 TYPES OF COST

Direct cost :-
Direct or prime cost is one can be easily & directly identified to a
particular product or plant.
Explicit cost :-
Explicit cost is the monetary payment made by the entrepreneur for
purchasing or hiring the services of various productive factors, which do
not belong to him. This cost is in the nature of contractual payment.
Implicit cost :-
Implicit cost arises in the case of those factors, which are possessed
by the entrepreneur himself. It is cost of self owned, self employment
resources that are frequently overlooked in computing the expenses of a
firm.
  

Actual cost :-
Actual cost refers to the actual expenditure
incurred for acquiring or producing a good or services.
 Opportunity cost :-
Opportunity cost is the cost which is not
actually incurred, but would have been incurred in the
absence of employment of self owned factors.
  Laws of Variable Proportions or Laws of Returns:-

This is the modern version of the law of diminishing marginal

returns. Under this law, it is assumed that only one factor of
production is variable while other factors are fixed.

Prof. Benham state the law as follows :

“As the proportion of one factor in a
combination of factors is increased after a point, the average
and marginal production of that factor will diminish.”
  Laws of Variable Proportions or Laws of Returns

 Three stages :
 Increase in product at increasing rates. (Increasing return
to variable factor)
 Increase in product at constant rates. (Constant return to
variable factor)
 Increase in product at decreasing rates. (Diminishing
return to variable factor)
 Prof. Marshall : laws or returns, i.e., laws of increasing,
constant and decreasing returns.
  Laws of Variable Proportions or Laws of Returns

 Law of variable proportion is related to the short period –

when with the increase in the units of a variable factor, MP
increases, it is increasing returns, if MP remains constant,
it is constant returns, and if MP decreases, it is the stage of
diminishing returns.
 Assumptions:-
 Techniques of production does not change.
 Other inputs remain fixed
 Assumes that it is possible to change factor proportions
 Law of increasing returns

Causes of increasing return :

Increase in efficiency
Fixed factors and fixed costs
Division of labour
Economies
Before the point of optimum combination
  Law of constant returns:-

According to Marshall:
“The stage of constant returns comes at that point, where the
effects of increasing returns and diminishing returns balance
each other.

”Reaching a certain point (in the table 4th unit of

labour is employed) a marginal product begins to diminish.
Thus the rate of increase in the total product slows down.
This is the stage of diminishing return.
  Law of diminishing returns

Causes for the operation of the law :-

1. Certain factors become fixed.

2. Certain factors become scarce.
3. Substitution of all the factors is not available, and
4. Maximum optimum level of production has already been
achieved.
  Law of returns to scale

The relationship between quantities of output and the

scales of production in the long run, when all the inputs are
increased in the same proportion, is called law of returns to
scale.

 Increasing return to scale – obtaining output at higher

percentage than the percentage increase in the input by
increasing the scale of production.

 Constant return to scale.

 Decreasing return to scale.
  Differences between returns to a variable factor and
returns to scale

Causes of the operation of the law:

 When internal and external economies exceed the diseconomies, the
stage of increasing returns to scale operates; when economies and
diseconomies are equal to each other, it becomes the stage of constant
returns to scale; and when diseconomies exceed the economies, law of
diminishing returns to scale is said to operate.
 Differences between returns to a variable factor and returns
to scale
1. Period
2. Change in factors
3. Change in factor ratio
4. Change in the scale of production
  U-SHAPED LONG RUN AVERAGE COST CURVE

 A very large flat portion in the centre of long run average

cost curve is depicted.
 It arrives if the economies of scale are exhausted at a very
modest scale of production and expansion in output,
diseconomies of scale do not occur.
 Only after a very large increase in output, diseconomies
exert themselves and bring about a rise in the long run
average cost.
 U-SHAPED LONG RUN AVERAGE COST CURVE
  L-SHAPED LONG RUN AVERAGE COST CURVE

 In the beginning when output is expanded through increase

in plant size & associated variable factors, cost per unit falls
rapidly due to economies of scale.
 Even after large scale of output, the long run average cost
does not rise; it may either remain constant or it may go on
falling slightly.
 The long run average cost rapidly falls but after a point it
remains flat throughout or even slope gently downwards
L-SHAPED LONG RUN AVERAGE COST CURVE

 
THANK YOU! 25