Introductory Economics

Khanim Guliyeva
 Concepts of Costs
Subhendu Dutta, Introductory Economics, Unit 3, Chapter 8
Concepts of costs
• Cost of production
• Real cost and nominal cost
• Explicit and Implicit costs
• Opportunity cost
• Private, External and Social costs,
• Economic costs
• Short run costs and long run costs
The importance of cost
 • The expenses incurred on all inputs of
production–both factor inputs and non-factor
inputs are known as the cost of production.
Symbolically, cost function can be expressed as under,

• C= f (Q, T, Pf)
 Real Cost and Nominal Cost
• Adam Smith regarded pains and sacrifices of labour as real
cost of production.
• Marshall included under it the “real cost of efforts of various
qualities”, and “real cost of waiting.”
 Explicit and Implicit Costs

• The sum of explicit costs and implicit costs constitutes the

total cost of production of a commodity.
Opportunity Cost
• ?
Private, External and Social Costs

• Social Cost = Private Cost + External Cost

Or
• External cost = social cost – private cost
Short Run Costs and Long Run Costs
The fixed costs include the costs of:
• The salaries and other expenses of administrative staff

• The salaries of staff involved directly in the production, but on a fixed term basis

• The wear and tear of machinery (standard depreciation allowances)

• The expenses for maintenance of buildings

• The expenses for the maintenance of the land on which the plant is installed and operates

• Normal profit, which is a lump sum including a percentage return on fixed capital and
allowance for risk.
The variable costs include the cost of:
• Direct labour, which varies with output

• Raw materials

• Running expenses of machinery

• TC = TFC + TVC
TFC curve
TVC curve
 AFC curve
• AFC= TFC/TQ
 AVC curve
• AVC=TVC/TQ
• AC= ATC/TQ = TFC/TQ + TVC/TQ = AFC+AVC
Marginal Cost
Marginal Cost Curve
 RELATIONSHIP BETWEEN AVERAGE COST AND MARGINAL COST

• When average cost falls with an increase in output, marginal

cost is less than the average cost (before point P).

• When average cost rises, marginal cost is greater than the

average cost (after point P)

• Marginal cost curve cuts the average cost curve at its minimum
point (minimum point on the average cost curve is also the point
of optimum capacity)
RELATIONSHIP BETWEEN AVERAGE COST AND MARGINAL COST
• Thank you for your attention! 