Cost PDF

10/28/2019 Cost - CBSE Notes for Class 12 Micro Economics - Learn CBSE
NCERT SOLUTIONS RD SHARMA CLASS 12 CLASS 11 CLASS 10 CLASS 9
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Cost – CBSE Notes for Class 12 Micro

Economics
June 4, 2019 by Sastry CBSE
Cost – CBSE Notes for Class 12 Micro Economics

CBSE Notes CBSE Notes Micro Economics NCERT Solutions Micro Economics
Introduction
This chapter gives a detailed version of cost and its types, related numericals and the
relationship between them.
Cost In Economics
1. Cost of producing a good, in Economics is the sum total of all the,

(a) Direct expenditure (actual money expenditure of a rm on purchasing goods or hiring factor services,
called explicit cost) and
(b) Indirect expenditures (imputed value of the owners estimated value of inputs provided, called ‘implicit
cost’) and
(c) Certain minimum pro t (refers to that amount of pro t which a producer must get in the long run to
continue to produce the given goods, called ‘normal pro t’.)
So, the sum total of explicit cost, implicit cost and normal pro t is called economic cost.
2. Explicit Cost:
(a) It refers to the actual money expenditure of a rm on purchasing goods or hiring factor services and
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non-factor inputs (like raw material, electricity, fuel etc.)
https://www.learncbse.in/cost-cbse-notes-class-12-micro-economics/ 1/15
(b) In other words, “explicit cost are those cash payments which the rm makes to outsiders for their goods
andNCERT SOLUTIONS
services.” RD SHARMA CLASS 12 CLASS 11 CLASS 10 CLASS 9
(c) For example—explicit cost of biscuit factory consists of our, milk, sugar etc. purchased from outside
andCBSE
rent,SAMPLE
electricity, wages, interest
PAPERS etc paid
LAKHMIR SINGHto factor of production.
3. Implicit Cost:
(a) Implicit cost is the imputed or estimated value of inputs supplied by the owner of the rm himself.
(b) In other words, Implicit costs are cost of self-supplied factors of production, which are generally not
recorded in rm’s account book.
(c) Implicit costs of a biscuit factory are imputed rent of owner’s own factory building,imputed wages for
owner’s working as a manager himself, imputed interest on his money capital used in the factory,
depreciation.
Short Run Cost
1. Cost function shows functional relationship between output and cost of production. It
gives the least cost combination of inputs corresponding to different levels of output.
Cost function is given as:
C = f(X), ceteris paribus, where, C = Cost and X = Output
2. Short Run cost are those in which some factors of production are xed and others are variable. So, it is
divided into two parts:
(a) Fixed costs (b) Variable costs
Total Fixed Cost (Supplement/Indirect/Overhead Cost)
1. Fixed costs are those costs of production which do not change with a change in output.
2. These are the costs incurred on xed factors, like rent of land and building, interest, etc. These are
unavoidable contractual costs.
3. Fixed costs are also called overhead costs or general costs because these are common for all the units
produced. These costs are also called supplementary costs or indirect costs.
4. The shape of Total xed Cost is horizontal (Parallel to X-Axis). They have to be incurred when the output
is large or small or even zero.
Total Variable Cost (Prime/Direct Cost) Chat with us on WhatsApp

1. The cost incurred on variable factors of production is known as TVC.
TVC = TC – TFC
NCERT SOLUTIONS
2. TVC is very much relatedRD SHARMA
with CLASS 12
the production CLASS 11
and uctuates CLASS 10
with the uctuation CLASS 9
in production. In case of
zero level of production, TVC would also be zero.
3. For
CBSEexample,
SAMPLEWages of casual
PAPERS labour,SINGH
LAKHMIR payment for raw material, etc.
4. The shape of Total Variable Cost is Inverse S-shape because of Law of variable Proportion. There are two
phases on which shape of total variable cost depends.
(a) In the rst phase, TVC increase at a to lower cost of production. This is because of proper utilization of
xed factor by employing more units of variable factor, specialization and division of labour. diminishing
rate, [concave shape] i.e., every additional unit of output produced leads
(b) In the second phase, TVC increase at an increasing rate, [convex shape]
i. e., every additional unit of output produced leads to higher cost of production. This is because of non-
optimal combination of variable factor with the xed factor.
Total Cost
1. During production, the expenditure incurred on various factors of production is known as total cost.
2. The thing, is has to remember, is that enterprise is one of the factors of production and the return of
enterprise is normal pro t. So, normal pro t is also included in total cost.
3. In other words, it is a sum of total xed cost and total variable cost.
TC = TFC + TVC
4. The shape of Total Cost is Inverse S- shaped because of law of variable Proportion.
(a) TC is divided into two parts TFC and TVC such that
TC = TFC + TVC.
(b) TFC curve is a horizontal line parallel to the x-axis.

(c) TVC is inverse S-shaped starting from the origin due to law of variable proportion.
(d) TC is aggregate of TFC and TVC. TC curve is inverse S-shaped starting from the level of xed cost. The
reason behind it shape is the law of variable proportion.
Average Fixed Cost (AFC)
1. The per unit cost incurred on xed factors of production is known as average xed cost.
2. AFC falls as output increases because AFC
3.The shape of AFC curve is a rectangular hyperbola as area under AFC curve (i.e. total xed cost) remains
same at different levels of output.
Average Variable Cost (AVC)
1. The per unit cost incurred on variable factors of production is known as AVC.
2. Average Variable Cost is U-shaped because of Law of Variable Proportion.

(a) NCERT SOLUTIONS
As we know RDAVC
the shape of SHARMA CLASS
depends upon the12shape of
CLASS
TVC.11Initially,CLASS 10 CLASS
TVC increases 9
at diminishing
rate (because Total Product Increases at increasing Rate), that makes the AVC to fall.
(b) CBSE
Thereafter,
SAMPLE TVC increases at
PAPERS increasing
LAKHMIR rate(because Total Product Increases at diminishing Rate), that
SINGH
makes the average variable cost to rise.
(c) So, from inverse S-shape, TVC curve, we derive the U shape AVC curve. It can also be explained with the
help of the following schedule and diagram.
Average Total Cost/Average Cost (ATC)

1. The per unit cost incurred on various factors of production is known as average cost. In other words, it is
the sum total of average variable cost and average xed cost.
2. Average Cost is U-Shaped because of Law of variable proportion:

(a) The shape of average cost (AC) depends upon total cost (TC).
(b) Initially, total cost (TC) increases at a diminishing rate (Total Product increases at Increasing rate), which
makes its average, i.e., average cost (AC) to fall, then reaches its minimum point.
(c) Thereafter, total cost (TC) increases at increasing rate (Total Product increases at diminishing rate),
which makes the average cost (AC) to rise. This type of production behaviour shows operation of law of
variable proportion.
3. Average Cost is also U-shaped because of Average Variable Cost and Average Fixed Cost:
(a) In the beginning, we nd that as output increases both AVC and AFC fall, therefore AC curve falls sharply.
(b) When AVC has started rising and AFC is falling, AC may continue to fall if the fall in AFC is more than the
rise in the AVC curve.
(c) But with further increase in output, AC would
start increasing because the rise in AVC offsets the fall in AFC.
(d) Therefore, the shape of the AC curve would be U-shaped— rst falling and then rising.
Marginal Cost
NCERT SOLUTIONS RD SHARMA CLASS 12
1. The cost incurred on additional unit of output is known asCLASS 11
Marginal CLASS 10
cost. CLASS 9
(a) As we know the shape of MC depends on the shape of TVC or TC. Let us suppose TVC.
(b) Initially, TVC increases at a diminishing rate (Total Product increases at Increasing rate), which makes
the gap of TVC, i.e. MC to fall.
(c) Thereafter, TVC increases at an increasing rate (Total Product increases at diminishing rate) which
makes the marginal cost to rise.
(d) So, from inverse S-shape TVC curve, we derive U shape MC curve. It can be explained with the-help of
following schedule and diagram.
Relationship Between the cost and curve
Relationship between AC and MC

1. The relationship between marginal cost anci average cost can be shown with the help of schedule.
The table given below shows the marginal costs, total costs and average costs at different levels of output.
(a) When MC is less than AC, AC falls (because MC pulls AC down). It can be seenChat
fromwiththe rstWhatsApp
us on three units
of the table.
(b) NCERT SOLUTIONS
When MC RD SHARMA
= AC, AC is constant CLASS 12
and at its minimum. CLASS 11 CLASS 10 CLASS 9
It can be seen from the fourth unit of the table.

(c) CBSE
WhenSAMPLE
MC is more than AC, LAKHMIR
PAPERS AC rises (because
SINGH MC pulls up AC). It can be seen from the fth unit of the
table.
2. The relationship between marginal cost and ave]rage cost with the help of Diagram:
(a) As long as MC is below AC, AC curve falls till intersection at point E.

(b) When MC curve comes to fall, it falls more rapidly than AC curve and reaches its minimum point B
earlier than the AC curve reaches its minimum point E.
Therefore, MC curve is rising from B to E whereas AC curve is still falling from A to E.
(c) When MC curve is rising, it cuts the AC curve at its minimum point E and after that point MC is above
than AC.
Relationship between TC and MC
1. When Marginal Cost falls, Total Cost increases at a diminishing rate.
2. When Marginal Cost is minimum (at point P), Total Cost is at its in exion point (at point P1).
3.When Marginal Cost rises, Total Cost increases at an increasing rate.
Relationship between Average Cost, Average Variable Cost and Marginal Cost –
1. As long as MC curve is below than AVC and AC Curve, AVC and AC curve fall till their intersection at a
point E and E1

2. When MC curve comes to fall, it falls much rapidly than AVC and AC curves and reaches its minimum
point A earlier than AVC and AC Curve reaches their minimum point E and E1
Therefore, MC Curve is rising from A to E whereas AVC is still falling from B to E and similarly, MC is rising A
to E1 and AC still falls from C to E1
3. When MC curve
CBSE SAMPLE is rising it cuts
PAPERS the AVC
LAKHMIR and AC curves at their minimum point E and E1
SINGH
Thereafter, AVC and AC curve rise because MC is above than AVC and AC curves.
Relationship between Average Variable Cost and Marginal Cost
1.Both AVC and MC curve are U-shaped re ecting the law of Variable proportion.
2. The minimum point of AVC curve (point b) will always occur to the right of the minimum point of MC
curve (point a).
3. When AVC is falling, MC is below AVC.

4. When AVC is rising, MC is above AVC
5. When AVC is neither falling nor rising, MC = AVC (point b).
6. There is a range over which AVC is falling and MC is rising. This range is between the v output levels
Xa and Xb.
Words that Matter
1. Cost in economics: It is the sum total of explicit cost, implicit cost and certain minimum pro t (normal
pro t).
2. Explicit Cost: It refers to the actual money expenditure of a rm on purchasing goods or hiring factor
services and non-factor inputs (like raw material, electricity, fuel, etc.)
3. Implicit Cost: Implicit cost is the imputed or estimated value of inputs supplied by the owner of the rm
himself.
4. Cost function: It shows functional relationship between output and cost of production. It gives the least
cost combination of inputs corresponding to different levels of output.
5. Short Run Cost: Short run cost are those in which some factors of production are xed and others are
variable.
6. Total Fixed Costs: Total Fixed costs are those costs of production which do not change with a change in
output.
7. Total Variable Cost: The cost incurred on variable factors of production is known as TVC.
8. Total
CBSE Cost: During
SAMPLE production,
PAPERS the expenditure
LAKHMIR SINGH incurred on various factors of production is known as total
cost.
9. Average Fixed Cost: The per unit cost incurred on xed factors of production is known as average xed
cost.
10. Average Variable Cost: The per unit cost incurred on variable factors of production is known as AVC.
11. Average Total Cost/Average Cost (ATC): The per unit cost incurred on various factors of production is
known as average cost. In other words, it is the sum total of average variable cost and average xed cost.
12. Marginal Cost: The cost incurred on additional unit of output is known as Marginal cost.
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10/28/2019 Cost - CBSE Notes for Class 12 Micro Economics - Learn CBSE

NCERT SOLUTIONS RD SHARMA CLASS 12 CLASS 11 CLASS 10 CLASS 9

CBSE SAMPLE PAPERS LAKHMIR SINGH

Cost – CBSE Notes for Class 12 Micro

Cost – CBSE Notes for Class 12 Micro Economics

1. Cost of producing a good, in Economics is the sum total of all the,

Total Variable Cost (Prime/Direct Cost) Chat with us on WhatsApp

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NCERT SOLUTIONS RD SHARMA CLASS 12 CLASS 11 CLASS 10 CLASS 9

CBSE SAMPLE PAPERS LAKHMIR SINGH

(b) TFC curve is a horizontal line parallel to the x-axis.

2. AFC falls as output increases because AFC

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2. Average Variable Cost is U-shaped because of Law of Variable Proportion.

Average Total Cost/Average Cost (ATC)

2. Average Cost is U-Shaped because of Law of variable proportion:

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NCERT SOLUTIONS RD SHARMA CLASS 12 CLASS 11 CLASS 10 CLASS 9

CBSE SAMPLE PAPERS LAKHMIR SINGH

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Relationship Between the cost and curve

Relationship between AC and MC

It can be seen from the fourth unit of the table.

(a) As long as MC is below AC, AC curve falls till intersection at point E.

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NCERT SOLUTIONS RD SHARMA CLASS 12 CLASS 11 CLASS 10 CLASS 9

CBSE SAMPLE PAPERS LAKHMIR SINGH

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3. When AVC is falling, MC is below AVC.

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