Managerial Economics

Cost Analysis Presented by :BABASAB PATIL

Different types of COST

Fixed cost &Variable cost Incremental cost & Sunk cost Real cost & Opportunity cost

Explicit cost & Implicit cost

Total cost, Average cost & Marginal cost

Fixed cost &Variable cost

Fixed cost :Fixed cost are those cost That are incurred as a result of the use of fixed factor inputs. They remain fixed at any level of output in the short run. E.g.: payments of rents for building Insurance premiums Depreciation & maintenance allowance. Variable cost: Variable cost are those cost that are incurred by the firm as a result of the use of variable factor inputs. They are dependent of the level of input. E.g.: prices of raw material Fuel and power charges.

Incremental cost & Sunk cost

Incremental cost :It can be defined as the cost of change

in the level of nature of activity. The amount by which the

total cost increases when output is expanded by one unit. It can be also be calculated by dividing the change in total cost by one unit change in output. Sunk cost: refer to those costs which are not altered or

changed with a change in the level of nature of activity. This

is the cost which cant be recover that is called as sunk cost.

Total cost, Average cost & Marginal cost

Total cost:Total cost is the aggregate of expenditure

incurred by the firm in producing given level of output.

Total cost is measured in relation to the
total cost=total fixed cost + total variable cost Average cost :Average cost of production is the total cost of

production

function by multiplying factor prices with their quantities.

production divided by units produced.

average cost=total cost of production/number of units produced

Marginal cost : Marginal cost is the cost of producing an extra unit of output. The marginal cost is also per unit cost of

production. It is the addition made to the total cost by

producing one more unit of output.
marginal cost = total cost(n) total cost (n-1)

REAL COST:

The term real cost of production refers to the physical quantities of various factors used in producing a commodity. Ex: real cost of a table is composed of a carpenters labor, two cubic feet of wood, a dozen of nails, half a bottle of varnish etc OPPORTUNITY COST:
The sacrifice or loss of alternative use of a given resource is termed as opportunity cost. Thus the opportunity cost is measured in terms of the forgone benefits from the next best alternative use of a given resource. Ex: The opportunity cost of managing once own business the salary that he could earn in other occupations.

EXPLICIT COSTS: Explicit costs are direct contractual monetary payments incurred through market transactions. Ex: wages and salaries, power charges.

IMPLICIT COSTS: Implicit costs are the opportunity costs of the use of factors which a firm does not buy or hire. Ex: wages of labor rendered by the entrepreneur himself, interest on capital supplied by him.