COST OF PRODUCTION

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 1
 COST OF PRODUCTION

SHORT RUN

A production period in which at least on

of the input is fixed*.
 
LONG RUN

A production period in which all the

inputs are variable**.
* A fixed input is an input which the quantity does not change
according to the amount of output. E.g. machinery
** A variable input is an input which the quantity varies according to
the amount of output. E.g. labour
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 2
 SHORT-RUN PRODUCTION
COST

TOTAL COST (TC)

The sum of cost of all inputs used to produce goods and services.


Total cost (TC ) also defined as total fixed cost (TFC) plus


total variable cost (TVC).  

TC = TFC + TVC

TOTAL FIXED COST (TFC) TOTAL VARIABLE COST (TVC)

 The cost of inputs that are  The cost of inputs that changes
independent of output. with output.
 Examples: Factory, machinery  Example: Raw materials, labours,
and etc. etc.

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 3
 SHORT-RUN PRODUCTION
COST (cont.)
AVERAGE TOTAL COST (ATC)
 The total cost per unit of output.
 The formula for average total cost (ATC) is the total
cost (TC) divided by the output (Q).
 
ATC = TC
  Q

TC = TVC + TFC

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 4
 SHORT-RUN PRODUCTION
COST (cont.)
AVERAGE FIXED COST (AFC)
Total fixed cost (TFC) divided by total output:
AFC = TFC
Q

AVERAGE VARIABLE COST (AVC)

Total variable cost (TVC) divided by total output:
AVC = TVC
Q
MARGINAL COST (MC)
The change in total cost that results from a change in output; the
extra cost incurred to produce another unit of output:
MC = TC
Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 5
 SHORT-RUN COST CURVES

TOTAL COST (TC)

COST
TC The sum of cost of all inputs used to produce goods
and services.
Also defined as TFC plus TVC

TVC TC = TVC + TFC

TOTAL VARIABLE COST (TVC)

The cost of inputs that changes with output.

TFC
TOTAL FIXED COST (TFC)
The cost of inputs that is independent of output.

QUANTITY

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 6
 SHORT-RUN COST CURVES
(cont.)
MARGINAL COST (MC)
COST Change in total cost that results from a change in output
MC = TC

 
MC ATC Q

AVERAGE TOTAL COST (ATC)

Total cost per output
AVC ATC = TC ATC = AFC + AVC
Q

AVERAGE VARIABLE COST (AVC)

Total variable cost (TVC) divided by total output
AVC = TVC
Q

AVERAGE FIXED COST (AFC)

Total fixed cost (TFC) divided by total output

AFC = TFC
AFC Q

QUANTITY

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 7
 Assume EEE company has fixed costs of RM80, and variables
cost and total cost as indicated in Table 5. Complete the cost
table.

SAME!!! AFC= TFC/Q

AFC= 80/1

TOTAL (TVC) (TC) (TFC) (AFC) (AVC) (ATC)

PRODUCTION @

(AC)

0 0   80   - - -
80 80
1 110 190        
2 150 230
80        
80
3 180 260        
80
4 220 300        

TFC=AFCxQ AVC=TVC/Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

AFC=TFC/Q AC=TC/Q
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 8
 Assume EEE company has fixed costs of RM80, and variables
cost and total cost as indicated in Table 5. Complete the cost
table.

SAME!!! AFC= TFC/Q

TOTAL (TVC) (TC) (TFC) (AFC) (AVC) (ATC)

PRODUCTION @

(AC)

0 0   80   - - -
80 80
1 110 190        
2 150 230 80   40   AFC= 80/2    
80
3 180 260        
80
4 220 300        

TFC=TC-TVC AVC=TVC/Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

AFC=TFC/Q AC=TC/Q
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 9
 Assume EEE company has fixed costs of RM80, and variables
cost and total cost as indicated in Table 5. Complete the cost
table.

SAME!!! AFC= TFC/Q

TOTAL (TVC) (TC) (TFC) (AFC) (AVC) (ATC)

PRODUCTION @

(AC)

0 0   80   - - -
80 80
1 110 190        
2 150 230
80   40      
3 180 260 80   26.7   AFC= 80/3    
80
4 220 300        

TFC=TC-TVC AVC=TVC/Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

AFC=TFC/Q AC=TC/Q
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 10
 Assume EEE company has fixed costs of RM80, and variables
cost and total cost as indicated in Table 5. Complete the cost
table.

SAME!!! AFC= TFC/Q

TOTAL (TVC) (TC) (TFC) (AFC) (AVC) (ATC)

PRODUCTION @

(AC)

0 0   80   - - -
80 80
1 110 190        
2 150 230
80   40      
80 26.7  
3 180 260      
4 220 300 80   20   AFC= 80/4    

TFC=TC-TVC AVC=TVC/Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

AFC=TFC/Q AC=TC/Q
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 11
 Assume EEE company has fixed costs of RM80, and variables
cost and total cost as indicated in Table 5. Complete the cost
table.
AVC= TVC/Q
SAME!!!
AFC= 110/1
TOTAL (TVC) (TC) (TFC) (AFC) (AVC) (ATC)
PRODUCTION @

(AC)

0 0   80   - - -
80 80 110  
1 190      
110 80 40
2 150 230 80        
26.7
3 180 260 80        
20
4 220 300        

TFC=TC-TVC AVC=TVC/Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

AFC=TFC/Q AC=TC/Q
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 12
 Assume EEE company has fixed costs of RM80, and variables
cost and total cost as indicated in Table 5. Complete the cost
table.
AVC= TVC/Q
SAME!!!
AFC= 110/1
TOTAL (TVC) (TC) (TFC) (AFC) (AVC) (ATC)
PRODUCTION @

(AC)

0 0   80   - - -
80 80 110  
1 190      
110 80 40
2 150 230 80        
26.7
3 180 260 80        
20
4 220 300        

TFC=TC-TVC AVC=TVC/Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

AFC=TFC/Q AC=TC/Q
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 13
 Assume EEE company has fixed costs of RM80, and variables
cost and total cost as indicated in Table 5. Complete the cost
table.
AVC= TVC/Q
SAME!!!
AVC= 110/1
TOTAL (TVC) (TC) (TFC) (AFC) (AVC) (ATC)
PRODUCTION @

(AC)

0 0   80   - - -
80 80 110  
1 190      
110 80 40
2 150 230 75 
80   26.7
   
3 180 260 80     60    
20
4 220 300     55    

TFC=TC-TVC AVC=TVC/Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

AFC=TFC/Q AC=TC/Q
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 14
 Assume EEE company has fixed costs of RM80, and variables
cost and total cost as indicated in Table 5. Complete the cost
table.
AVC= TVC/Q
SAME!!!
AVC= 110/1
TOTAL (TVC) (TC) (TFC) (AFC) (AVC) (ATC)
PRODUCTION @

(AC)

0 0   80   - - -
80 80 110   55 
1 190    
110 80 40
2 150 230 75  115  
80   26.7
 
3 180 260 80     60   86.7
 
20
4 220 300     55   75  

TFC=TC-TVC AVC=TVC/Q

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

AFC=TFC/Q AC=TC/Q
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 15
 Complete Table 5 using the information provided

FIXED!!!
ALL SAMA

Q TFC AFC TVC AVC

0 40   --

1 40    12

2 40    10

3 40    12

4 40    14
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 16
 Complete Table 5 using the information provided

FIXED!!!
ALL SAMA

Q TFC AFC TVC AVC

0 40   --

1 40 40/1= 40 12X1=  12  12

2 40 40/2= 20 10X2=  20  10

3 40/3= 13.3 12X3=  36  12

40
4 40 40/4= 10 14X4= 56
   14
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
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 AFC= TFC/Q
AC=TC/Q
AVC=TVC/Q
PRINCIPLES OF ECONOMICS Third Edition
© Oxford Fajar Sdn. Bhd. (008974-T), 2013
All Rights Reserved
6– 18
 TC=ACXQ
TFC=AFCXQ
TVC=AVCXQ

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 19
  TC AC
 TFCAFC
 TVC AVC

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

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