BY:-

NEHA SHARMA
CENTRAL UNIVERSITY OF RAJASTHAN
•Expenditure incurred by a producer on fixed and
variable inputs may be termed as cost of
production.
• The expense that must be incurred in order to
produce goods for sale.
1)Short Run Cost
2)Long Run Cost
•In the short run minimum one or more than one
factors are fixed and others are variable like
land ,capital equipment etc.
• Short run costs:-where a number of cost will be
fixed that is short run cost.
•In the long run all the factors are variable.
•Long run costs:- In the long run there are no
fixed costs since all the costs are variable.
Short Run Costs
1) Total Cost
a) Total fixed cost
b) Total variable cost
2) Average Cost
a) Average fixed cost
b) Average Variable cost
3) Marginal Cost
TOTAL FIXED COST:- fixed costs are
those which are independent of
output and that are spent and can not
be changed in the period of time.
 Output TFC
100 (Q) (£)

80 0 12
1 12
2 12
60 3 12
4 12
40 5 12
6 12
7 12
20

0
0 1 2 3 4 5 6 7 8

TFC

fig
Short Run Costs
TOTAL VARIABLE COSTS:-Total variable cost is
the sum of amounts spent for each of the
variable inputs used.
Total variable cost change with changes in
output in short run. they increase or decrease
when the output rises or falls.
 Output TFC TVC
100 (Q) (£) (£)

80 0 12 0 TVC
1 12 10
2 12 16
60 3 12 21
4 12 28
40 5 12 40
6 12 60
7 12 91
20

0
0 1 2 3 4 5 6 7 8

TFC

fig
Total Costs
The Sum of the variable and fixed costs are
total costs.
TC=TFC+TVC
 Output TFC TVC TC
100 (Q) (£) (£) (£) TC

80 0 12 0 12 TVC
1 12 10 22
2 12 16 28
60 3 12 21 33
4 12 28 40
40 5 12 40 52
6 12 60 72
7 12 91 103
20

0
0 1 2 3 4 5 6 7 8

TFC

fig
Average Cost
Average cost is equals to total cost divided by
output.
 AC=TC/Q
 AC=AFC+AVC
Average Cost
AVERAGE FIXED COSTS:-Average fixed cost is
equals to total fixed cost divided by quantity
produced .

AFC=TFC/Q
Average Cost
AVERAGE VARIABLE COSTS:-Average variable
cost is equals to total variable cost divided by
quantity produced .

AVC=TVC/Q
Marginal Cost
Change in total cost due to one unit change in
output.
MC=TCn-TCn-1
 MC
Costs (£)

fig
Output (Q)
 MC
AC
AVC
Costs (£)

x
AFC

fig
Output (Q)
Relationship B/W Average and
marginal costs
If MC<AC then AC is falling.
If MC=AC then AC is at its lowest point.
If MC>AC then AC is rising.
•Long run total cost
•Long run average cost
•Long run marginal cost
Long Run Total Costs
The long run total cost is the minimum
Cost at which each level of output can be
produced.
Long Run Average
Costs
[ENVELOPE CURVE]
The long run average cost is that which shows the
minimum cost per unit of producing each output level,
corresponding to different scales of productivity.
 LRAC
Costs

O
Output
fig
 Why LAC is U Shaped
1) Economies of scales
a) internal economies
b) external economies
2) Diseconomies of scales
a) internal diseconomies
b) external diseconomies
SYNTHESIS
According to the modern economists LAC is ‘L’
shaped.
Theoretically LAC is U shaped but practically it
is ‘L’ shaped.
Like in the multinational corporations LAC is ‘L’
shaped.
Marginal Cost Curve
In the long run ,change in total cost due to
one unit change in output is known as long
run marginal cost.
 LRMC
Initial economies of scale,
then diseconomies of scale
LRAC
Costs

O Output
fig
Long run average and
marginal costs
When LRMC<LRAC then Ac is falling.
When LRMC=LRAC then Ac at its Min.
When LRMC>LRAC then Ac is rising.
•The money that comes into the firm from the
scale of their goods.
a)Total revenue
b) Average revenue
c) Marginal revenue
Revenue
Total revenue:-Total revenue of a firm is the
total money receipts with the scale of its
product.
The product of price and the number of units
sold will give us the firms total revenue.
TR=P*Q where p=price/unit
Q=quantity of goods sold
Revenue
Average revenue:-Average revenue is the
per unit revenue received from the sale of
one unit of a commodity.
AR=TR/Q
AR=(P*Q)/Q
AR=P
Revenue
Marginal revenue:-change in total revenue
due to one unit change in output .
MR= TRn-TRn-1
Price (£)

AR, MR (£)
S

P = AR
Pe
= MR

D
O O
Q (millions) Q (hundreds)

(a) The market (b) The firm

fig
 8 Q P TR MR
(units) =AR (£) (£)
1 (£)
8 8
6 6
2 7 14
4
3 6 18
2
4 4 5 20
0
5 4 20
-2
AR, MR (£)

6 3 18
2 -4
7 2 14

0
1 2 3 4 5 6 7 AR
-2

-4 Quantity

MR
fig
THANKS
QUESTION & ANSWER SESSION