EGR3101: ENGINEER IN

SOCIETY II

CHAPTER FOUR:
THEORY OF COST

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 INTRODUCTION

 Profit maximizing requires deciding

• How much output to produce
• How much of various inputs to use in producing this output

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 COST OF PRODUCTION
 This is the input in terms of human and material resources in
producing a commodity.
 For goods and services to be produced, all the four factors of
Production
 Land
 Labour
 Capital and
 Entrepreneurship, must be combined.
 Moreover, the various costs incurred in the application of
these factors are generally referred to as cost of production.

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 Basic concept

Cost of production can be classified according to

whether they are
I. FIXED COSTS:
• These are costs of resources which do not vary with the level of
output in the short term.
• No matter the output of products produced with the product
range, they remain the same.
• E.g. Machinery, land, salary and etc.

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 Basic concept cont’d

II. VARIABLE COSTS

o Costs associate with variable inputs and do vary with
output.
o The more that are produced, the higher the cost.
o E.g. Raw materials, Electricity tariff etc.

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 Basic concept cont’d

III. TOTAL COSTS

• Sum of explicit plus implicit
• In other word, Summation of fixed and variable cost

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 Basic concept cont’d

IV. AVERAGE COSTS

• This the cost per unit output
• Total cost divided by the total output.

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 End of chapter four
Thanks for your attention.

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