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MANAGERIAL ECONOMICS
Cost Concept
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Managerial Economics Cost Concepts
ACKNOWLEDGEMENT
We the members of the group would like
to thank Prof. Pandey for helping us to
prepare this project. It is because of your
guidance and support we could get the
required information and compile it into a
project form and hereby submit this work.
Thank you for your valuable time and effort.
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Managerial Economics Cost Concepts
GROUP MEMBERS
Swati Tikku 95
Pooja Patil 71
Hardik Gohel 114
Riten Sakhiya 117
Sagar Sangani 110
Rajdeep Pandere 102
Aftab Khan 113
Jaiveer Duggal 128
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Managerial Economics Cost Concepts
INTRODUCTION
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Managerial Economics Cost Concepts
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Managerial Economics Cost Concepts
D) OPPORTUNITY COST
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Managerial Economics Cost Concepts
IMPORTANCE-
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Managerial Economics Cost Concepts
G) Fixed Cost
Fixed costs are the cost which do not change with the
change of level of output. Production may come down to
zero or be doubled, fixed cost remains the same. These
have to be borne even if no output is produced. For
instance, a sugar mill will usually remains closed for
about three months during a year for want of raw
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Managerial Economics Cost Concepts
material but still the mill owner has to incur certain cost
like rent of factory building, interest in past borrowing,
salaries of permanent employees, municipal taxes, etc.
These are also called supplementary cost or overhead
cost.
H) Variable Cost
These are the costs which vary directly with the change in
the level of output. Such cost increase when output
increases and decreases when
output falls. That is why they are direct cost since they vary
directly with the change in the level of output. The cost
incurred on raw material, fuel, wages of temporary labor,
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Managerial Economics Cost Concepts
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Managerial Economics Cost Concepts
1. FC do not increase
1. VC change with
or decrease with increase or
changes in the level of output.
decrease in level of output.
2. VC are related with
2. FC are related with
variable factors capable of
fixed factors which cannot be
being changed during short
changed during short period.
period.
3. FC can never be zero 3. VC is zero (nil) when
even when production is production only when VC are
stopped. met.
4. Production may 4. A firm continues
continue even at the loss of FC production only when VC are
during short period. met.
5. FC curve is parallel 5. VC curve moves up
to X-axis. from left to the right.
6. FC are present only 6. In the long run, ail
in short period. costs are the variable costs.
Fixed costs and variable costs constitute total cost of
production. These are formally called total fixed costs, total
variable costs and total costs respectively.
Explain the following:
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Managerial Economics Cost Concepts
between fixed cost and variable cost in the long run. Again in
short period TFC remains the same but AFC falls with every
increase in volume of output. On the other hand, TVC
changes according to volume of output affecting AVC.
(i) Total fixed costs are the costs which remain the same
at different levels of production. Since TFC Remains
constant irrespective of the size of output, TFC curve
is parallel to X-axis.
(ii) Total variable costs are sum of the cost of which vary
directly with the size of output produced. Such costs
change with change in level of output. In other words,
total variable costs go up as output is increased and
fall as output in decreased. TVC is zero at output.
Remember, rate of increase in TVC depends upo
which phase of ‘law of returns to a variable factor’ is
in operation. Briefly TVC increases at a decreasing
rate in the beginning, then at a constant rate and
finally at an increasing rate making TVC curve
concave in its shape.
TC = TFC
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Quantity of TVC TC
Output (units) TFC (Rs.) (Rs.) (Rs.)
0 100 0 100
1 100 50 150
2 100 70 170
3 100 80 180
4 100 105 205
5 100 135 235
6 100 170 270
TFC
TV
Cos
C
t
TFC
Quantity of
Output
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It can be seen from the table that TFC is constant at Rs. 100
whether output is zero or 6 units. On the other hand, TVC is
zero output and increases. Since TFC is constant, TC exceeds
TVC by amount of TFC.
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Managerial Economics Cost Concepts
AFC = Total
Fixed Cost
Beware that fixed cost (i.e., total fixed cost) remains fixed or
same at different levels of production.
AVC = Total
AFC = 12,500
Variable Cost = Rs. 125
100
No. of units
It should be kept in mind that in the beginning AVC
decreases but after reaching the stage of minimum cost, it
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Managerial Economics Cost Concepts
ATC = Total
Cost
Like total cost which is the sum of total fixed cost and total
variable cost, ATC is also the sum of AFC and AVC.
Symbolically:
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ty
(units) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
0 120 0 120 - - - -
1 120 60 180 120 60 180 60
2 120 80 200 60 40 100 20
3 120 90 210 40 30 70 10
4 120 110 230 30 27.5 57.5 20
5 120 150 270 24 30 54 40
6 120 240 360 20 40 60 90
4) AFC, AVC and ATC curves
All the three average costs have been depicted below.
AVC and ATC curves do not intersect because difference
between the two is AFC which can never be zero. Thus
positive value of AFC keeps the AVC and ATC curves apart.
Y AT
AV
Cost
AF
Output
O X
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AT
Cost
AV
O
X
Output
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Y X
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B
MC/TVC (RS.)
MC
TVC
O
Q
OUTPUT (UNITS)
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MC
P3
P2
PRICE
P1
X
O
Qb1 Q2 Q3
Qa1 OUTPUT
Average Cost =
Total Cost
AC = 2,500 = Rs. 100
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O
X
OUTPUT
14) Relationship between Average Cost and Marginal
Cost
There is an apparent relationship between AC and MC
since both have been derived from total cost. It needs to be
remembered that between AC and MC, it is MC which brings
about changes (rise or fall) in AC and not the rises, it pulls AC
up. Conversely we can also say that when average increases,
marginal is more than average and when average falls,
marginal is less that average. Relationship between AC and
MC is summed up with the help of following imaginary cost
schedule.
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Output TC AC MC
(Units) (Rs.) (Rs.) (Rs.)
1 20 20 20
2 38 19 18
3 54 18 16
4 72 18 18
5 100 20 28
6 150 25 50
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A
MC
AC
D
COST
O
25 X
OUTPUT
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LMC
Y
COST (Rs.)
LAC
Lowest AC
F
Optimum output
O X
Q
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OUTPUT (UNITS)
Managerial Economics Cost Concepts
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Managerial Economics Cost Concepts
BIBLIOGRAPHY
Introductory Micro Economics – C. B.
Sachdeva
Managerial Economics – Vipul Publications
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