Cost Analysis

Nature of Costs: Explicit Cost Implicit Cost Opportunity cost Economic and accounting cost

Determinants of Cost: Output level Price of factors of production Productivity of factors of production Technology

Short run cost functions: Short run is the

time period during which some of the firms inputs are fixed, total obligations on these inputs are called total fixed cost. Interest payment on borrowed capital plant and equipment Property tax

 Salaries of top management who hired for fixed period of time 1000 Total Variable Costs: obligation of the firms on Inputs that can vary easily on short notice. Raw material cost Fuels Labor cost Excise tax Total cost: TC = TFC + TVC

Long run total cost curve (LTC): LTC curve is derived from derived from the firms expansion path and shows minimum long-run total costs of producing various levels of output.

Plant size and economies and diseconomies of scale: The U shaped LAC curve is based on the assumption that economies of scale prevail at small levels of output and diseconomies of scale prevails at larger levels of output. Economies of Scale:
Economies of scale refers to situation in which output grows proportionately faster than inputs. Technical Specialisation large organisations can employ specialised labour Indivisibility of plant machines cant be broken down to do smaller jobs! Increased dimensions bigger containers can reduce average cost Commercial Large firms can negotiate favourable prices as a result of buying in bulk Large firms may have advantages in keeping prices higher because of their market power

 Financial Large firms able to negotiate cheaper finance deals Large firms able to be more flexible about finance share options, rights issues, etc. Large firms able to utilise skills of merchant banks to arrange finance Managerial Use of specialists accountants, marketing, lawyers, production, human resources, etc.

Diseconomies of scale: The

disadvantages of large scale production that can lead to increasing average costs. Problems of management Maintaining effective communication Co-ordinating activities often across the globe! De-motivation and alienation of staff

 Divorce of ownership and control