KADI SARVA VISHWAVIDYALAYA

GANDHINAGAR

BACHELOR OF COMMERCE
SEMESTER - 2
 Ashvinbhai A. Patel Commerce College
Gandhinagar

Division-A
*Subject-Economic
ECONOMIC PROJECT

Submitted to
CREATED BY

Amit Surera
 CONCEPTS OF COST
Cost
It is payment made to the factors of production which are used in the
production of that commodity.
Cost Function
It show the functional relationship between output and cost of
production. It gives the least cost combination of input corresponding to different
levels of output.
Short-run Costs
These are the costs over a period during which some factors are in
fixed supply, like plant, machinery, etc.

Long-run Costs
These are the costs over a long period enough to permit changes
in all factors of production.
 TOTAL COSTS

Total cost ( TC = TFC + TVC )

Fixed Costs (TFC )
These are short-run. Fixed costs are
the total of expenditure incurred by the producer on
the purchase or hiring of fixed factors of production.
Fixed costs are costs that do not change with a
change in output .They are incurred irrespective of
the amount of goods produced Example overhead
expenses, Wages/ salaries, depreciation of machinery,
andOutput
insuranceTFC(Rs)
amount.
0 10
1 10
2 10
3 10
4 10
Total Variable Cost

Variable costs are those costs which very

with the quantity of output produced. Example
direct labour , raw materials fuel , etc. It also
called Prime cost. TVC curve is an inverse S-
shaped curve. The behind its shape is the law of
Output proportion.
variable TVC(RS)

1 10

2 18

3 30

4 45
 Total cost
Total cost (TC) is defined as the aggregate of all costs of producing
any given level of output. It is the total expenditure incurred by a firm for
obtaining factors of production for production of a commodity. TC is derived
by the sum total of TFC and TVC. Symbolically,
TC = TFC + TVC
the reason behind the shape of TC curve is the law of variable proportion

Units TFC TVC TC

0 10 0 10
1 10 10 20
2 10 18 28
3 10 30 40
4 10 45 55
 Difference Between TFC and TVC
TOTAL COST (TFC) TOTAL VARIABLE (TVC)

TFC are incurred on the fixed TFC are incurred on variable

factors of production like factors of production like labour,
machines, buildings, insurance, raw materials, transport, etc.
etc.
TFC do not increase or decrease TVC changes with changes in
with a rise or fall in the level of the level of output.
output
TFC cannot be changed during TVC can be changed during
short-run. short-run.
TFC are never zero even when TVC are zero when production is
production is stopped. stopped.
Production at the loss of TFC Production at the loss of TVC will
may continue. not continue.
Graphically, TFC curve is Graphically, TVC curve is inverse
parallel to x-axis. S-shaped.
Average Cost ( AC = AFC + AVC )

In the short-run, the average cost curve are more important than the
total cost curve. The average cost is easily obtained as follows:
TC =TFC + TVC ..(1)
Dividing equation (1) by the level of output (x), we get
AC = AFC + AVC .(2

Where,
X = Level of output
AC = Average cost
AFC = Average Fixed cost
AVC = Average Variable Cost
Average Cost (AC)
AC is defined as cost of producing per unit of the
commodity. AC is obtained by dividing TC by the level of
output. Symbolically,
AC = TC
X
The curve as derived from TC curve is U-shaped. It shows
that as output increases the value of AC fall continuously till it
reaches a minimum point. Beyond this point, the AC starts
rising. The reason behind the U-shape of AC curve is the law of
variable proportion.

Units TC AC
1 20 20
2 28 14
3 40 13.3
4 55 13.8
AC can be obtained by adding AFC and AVC
values, i.e.,

AC = AFC + AVC

Units AFC AVC AC

1 10 10 20

2 5 9 14

3 3.3 10 13.3

4 2.5 11.3 13.8

 Average Fixed Cost
AFC is defined as the fixed cost of producing per unit
of the commodity. It is obtained by dividing TFC by the level of
output.
AFC = TFC = TFC
No. of unit produced X
The AFC curve derived from TFC curve is a rectangular
hyperbola. It shows declining values of fixed coat per unit of
output produced. The downward sloping AFC curve can never
touch either the x-axis or the y-axis.
Units TFC AFC
0 10
1 10 10
2 10 5
3 10 3.3
4 10 2.5
 Average Variable Cost
AVC is defined as the variable cost of producing per
unit of the commodity. It is obtained by dividing TVC by the
level of output. That is,
AVC = TVC
X
The AVC curve is derived from TVC curve and is U-
shaped. It shows that as output increases, the value of AVC
falls continuously till it reaches a minimum point. Beyond this
point, the AVC starts rising. The reason behind the U- shape of
AVC curve is the law of variable proportion.
Units TVC AVC
1 10 10
2 18 9
3 30 10
4 45 11.3
 MARGINAL COST (MC)
Marginal Cost (MC)
Marginal cost is defined as addition made to
total variable cost or total coast when one more unit of
output is produced. Symbolically,
MC = TVC or TC
X X
Alternatively,
MC = TCn - TCn-1
or MC = TVCn TVCn-1

Also,
MC = TVC
That is sum total of MC corresponding to different units
of output gives TVC.
 Units TVC MC
0 0 -
1 10 10
2 18 8
3 30 12
4 45 15

MC Curve, as derived from the TVC curve, is U-shaped. The

reason behind its shape is the law of Variable Proportion.
 Relationship Between MC and AC Curve
Units TC AC MC AVC
0 10 - - -
1 20 20 10 10
2 28 14 8 9
3 40 13.3 12 10
4 55 13.8 15 11.3
 Both AC and MC are derived from TC by the
Formulas:
AC = TC
x
And MC = TC
x
Both AC and MC curve are U-shaped, reflecting the law
of Variable Proportion.
AC includes both variable cost and fixed cost since AC
= AFC + AVC. But MC is addition made only to variable
cost when output is increased by one more unit.
When AC is falling, then MC is below AC.
When AC is rising, then MC is above AC.
When AC is neither falling nor rising, then MC is equal
to AC.
MC curve cuts the AC curve at its minimum point.
Bibliography

SYNERGY KNOWLEDGEWARE
Basics of Micro Economic Theory
Krupa Bhatt
V.K GLOBAL PUBLICATIONS PVT.LTD.
Introductory Microeconomics
T.R.Jain
V.K.Ohri
SARASWATI HOUSE PVT.LTD
Introductory Microeconomics
Dr.Deepashree
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