Cost and its types

Cost of production

Cost of production reffers to expenditure incurred by a firm on the factor inputs(land,labour,capital and entrepreneurship) as well as non-factor inputs (like raw material) for the production of commodity.

                 The functional relationship between cost and output is called cost function.It may be specified as C=f(Q) here c=cost of production,Q=quantum/amount of output.

             The cost function studies the functional relationship between cost(input) and output.It shows least combinations of inputs corresponding to different levels of output.

Fixed cost:Fixed costs are those costs which are independent of output this means that these costs don't change with the change in output.These cost are fixed amount which must be incurred by a firm in the short run whether the output is small or large,even if the firm close down for some time in the short run,the fixed cost remain in business.These include charges such as contractual rents,insurance fee,maintenance costs,property tax etc.

Variable cost: the expenditure incurred by the firm on the use of variable factors of production.These costs may change when the output changes.if the firm suffer losses then it may remove some factors of production like labour.Likewise,if the goal of a firm is to maximize or increase its output quantity then it may hire more factors like labour.Variable cost are  also called prime cost or direct cost. purchase of raw material,expenses on power electricity,wear and tear expenses are important examples of variable cost.

Total cost: This is the sum total of fixed cost and variable cost.Mathematically,

       TC=TFC+TVC 

TC stands for total cost,TFC for total fixed cost and TVC for total variable cost.

●Remmember

▪TFC is constant at all levels of output.

▪TVC increases as output increases.

Average cost: Average cost(AC) is the per unit cost of production.it is the sum total of AFC and AVC that is,AC=AFC+AVC.Average cost has two types:Average fixed cost (AFC) and Average variable cost (AVC)

Average fixed cost:It is the per unit cost of fixed factors of production.Average cost is obtained by deviding fixed cost by total units of output.Symbollically,

    AFC=TFC/Q

Average variable cost:Average variable cost(AVC) is the per unit cost of variable factors of production.Average variable cost is obtained by deviding Total variable cost(TVC) by total units of output(TQ) symbolically,

          AVC=TVC/TQ

Marginal cost: Marginal cost is the change in total cost when an additional unit of output is produced.MC can be obtained by comparing either the change in total cost or the change total variable cost (TVC). as output increases total fixed cost does not change therefore Marginal cost(MC) reflects only the change in total variable cost(TVC).

symbolically,

                         MCn=TCn-TCn-1