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Cost Chapter Notes Class 11 Microeconomics

Notes of cost chapter

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3K views9 pages

Cost Chapter Notes Class 11 Microeconomics

Notes of cost chapter

Uploaded by

Harsha Amlani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Cost Chapter Notes Class 11

Microeconomics
Cost means the total actual expenditure on inputs (explicit cost) and the
imputed value of an input supplied by the owner (implicit cost). Here are the
cost chapter notes class 11.

 Difference between Explicit Cost and Implicit Cost


 Short Run Cost
o Fixed Cost (TFC)
o Variable Cost
o Total Cost
 Relationship between TC, TFC, and TVC
 Average Cost
o Average Fixed Cost
o Average Variable Cost
o Average Total Cost
 Relationship between AC, AFC, and AVC
 Marginal Cost
 All Formulas

Difference between Explicit Cost and


Implicit Cost
Types of Costs
Basis Explicit Cost Implicit Cost

It is the payment made to outsiders for


Meaning It is the cost of self-supplied factors.
hiring factor services.

No money payment is involved as it


Money It involves actual money payment on
involves the imputed value of factors owned
Payment buying & hiring inputs.
by the firm.

Examples Payment of wages, rent, insurance, etc. Rent of own land, interest on capital, etc.

Explicit Cost Vs. Implicit Cost


Short Run Cost
Fixed Cost (TFC)

It refers to the cost that does not vary directly with the output level. For
example: Rent, interest, loan, insurance premium, etc.
Output Fixed Cost

0 12

1 12

2 12

3 12

4 12

Schedule for Fixed Cost


Variable Cost

It refers to the cost which varies directly with the level of output. For example:
Raw material.

Output Variable Cost

0 0

1 6

2 10

3 15

4 24

5 35

Schedule for Variable Cost


Total Cost

It is the total expenditure incurred by a firm on the factors of production required


for producing a commodity. It is the total of total fixed cost and total variable
cost.
TC = TFC+TVC
Output TFC TVC TC

0 12 0 12

1 12 6 18

2 12 10 22

3 12 15 27

4 12 24 36

5 12 35 47

Schedule for TC, TFC, and TVC


Relationship between TC, TFC, and TVC
Curves of TC, TVC, and TFC
 TFC curve is a horizontal straight line parallel to the x-axis as it
remains constant at every level of output.
 TC & TVC curves are inversely S-shaped because of the Law of
Variable Proportions.
 At zero output TC is equal to TFC because there is no variable cost.
 TC & TVC are parallel to each other because of constant TFC.
 The vertical distance between TFC & TC is equal to TVC. As TVC rises
the distances between TFC & TC also rise.
Average Cost
There are 3 types of average cost:
1) AFC – Average Fixed Cost
2) AVC – Average Variable Cost
3) ATC – Average Total Cost

Average Fixed Cost

AFC refers to the per unit fixed cost of production.


AFC = TFC/Q
Output TFC AFC

0 12 infinity

1 12 12

2 12 6

3 12 4

4 12 3

5 12 2.4

Schedule for AFC


 The AFC curve slopes downward.
 AFC curve is a rectangular hyperbola which means the area under the
curve remains the same at all the points.
Note: The AFC curve is a rectangular hyperbola. It gets nearer to both axes but
never touches any one of them.

AFC never touches the x-axis. TFC can never be zero, whereas it cannot touch
the y-axis because at zero level of output, TFC is positive and any positive value
divided by zero becomes an infinite value.

Average Variable Cost

Average Variable Cost refers to the per unit variable cost of production.
AVC = TVC/Q

Average Variable Cost


Output Total Variable Cost (TVC)
(AVC)

0 0 –

1 6 6

2 10 5

3 15 5
4 24 6

5 35 7

Schedule for AVC


AVC is U-shaped as it initially falls, remains constant & finally starts increasing.

Average Total Cost

It refers to the per unit total cost of production.


AC = TC/Q
AC = AVC + AFC

Output TC AC

0 12 infinity

1 18 18

2 22 11

3 27 9

4 36 9

5 47 9.4

Schedule for AC
Relationship between AC, AFC, and AVC
Curves of AC, AVC, and AFC
 AC & AVC are U-shaped because of the Law of Variable Proportion.
 AFC is a rectangular hyperbola which means the area under the curve
remains the same at all the points.
 AC curve will always lie above AVC because AC includes both AVC and
AFC.
 AVC reaches its minimum points lower than that of AC because when
AVC is at its minimum point, AC is still falling because of falling AFC.
 As output increases, the gap between AC and AVC decreases but they
never intersect each other because the gap between AC & AVC
represents AFC which keeps on falling but never becomes zero.
Marginal Cost
Marginal Cost refers to the addition to the total cost when one more unit of
output is produced.
MC = delta TC/delta Q or TCn-TC(n-1)
Output TC MC

0 12 –

1 18 6

2 22 4

3 27 5

4 36 9

5 47 11

Schedule for MC
MC is a U-shaped curve because it initially falls, reaches its minimum point &
then starts increasing because of the Law of Variable Proportion.

All Formulas
1. TC = TVC + TFC
2. TC = (sigma)MC + TFC
3. TVC = TC – TFC
4. TVC = (sigma)MC
5. TFC = TC – TVC
6. AC = TC/Q
7. AC = AVC + AFC
8. AFC = TFC/Q
9. AFC = AC – AVC
10. AVC = TVC/Q
11. AVC = AC – AFC
12. MC = (delta)TC/(delta)Q
13. MC = TCn – TC(n-1)

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