Economics is the study of scarcity and choice scarcity means that there is a finite amount of a good or service basically they are limited. These lecture notes were prepared by xingze wang, yinghsuan lin, and frederick jao specifically for mit opencourseware. Thus, the smc curve is also ushap ed, a s seen ab ove. In economics, cost of production has a special meaning. Scarcity is the condition in which our wants are greater than our limited resources.
Scribd is the worlds largest social reading and publishing site. Cost refers to the amount of expenditure incurred in acquiring some thing the expenditure incurred to produce an output or provide service thus the cost incurred in connection with raw material, labour, other heads constitute the overall cost of production a managerial economist must have a clear understanding of the different cost concepts for clear. Cost concepts and design economics free download as powerpoint presentation. Surveys by ferraro and taylor 2005 point to abysmal understandings of the concept of opportunity cost by us faculty, graduates and undergraduates. It is more limited in scope as compared to microeconomics. We study some important concepts of costs, and traditional and modern theories of cost.
Example of cost concepts y tfc tvc tc afc avc atc mc 10 30 48 65 81 96 108 116 120 117 1600 2000 2200 2600 3200 4000 5000 6200 7600 2000 2600 3000 3200 3600 4200 5000 6000 7200 8600 100 33. Economics module 3 cost and revenue producing goods and services 76 notes we can express the above example in the form of a table as follows. The shadow price of a good measures the net impact on social welfare of a unit increase in the supply of that good by the public sector. In this chapter our concern is with some basic preliminary concepts. Explain the concept of opportunity cost and explain why accounting profits and economic profits are not the same. Cost and costing techniques in managerial economics informatics. It is all of the payments or expenditures necessary to obtain the factors of production of land, labor, capital and management. The opportunity cost concept has been advocated as the prime decision cost concept by economists and accountants, notably scholars of the london.
The cost of loss to the environment caused by giga is estimated to be rs. Marginal cost is an increase in total cost that results from a one unit increase in output. Cost benefit analysis is the examination of a decision in terms of its consequences or costs and benefits. Theory of production, in economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells its outputs or products it will produce, and how much of each kind of labour, raw material, fixed capital good, etc. By cost of production is meant the total sum of money required for the production of a specific quantity of output. One of the most important aspects of choice in economics is the idea that every choice has tradeoff what didnt you choose. The concept of opportunity cost is one of the most important ideas in economics. The meaning and concept of revenue micro economics. Cost curves or cost concepts in economics authorstream presentation. The other notable contributors are daven port, knight, wicksteed and robbins. Production economics, thus provides a framework for decision making at the level of a firm for increasing efficiency and profits. In the context of project evaluation a cost benefit test is a simple decision rule. The kind of cost concept to be adopted in a particular.
Ppf primarily represents a hypothetical boundary between the maximum combination of goods and services that an economy can produce with the available resources and technology. Total fixed costs tfc average fixed costs afc total variable costs tvc average variable cost avc total cost tc average total cost atc marginal cost. Lecture notes principles of microeconomics economics. Ordinarily, costs refer to the money expenses incurred by a firm in the production process.
It is all of the payments or expenditures necessary to obtain the factors of. The concept of opportunity cost occupies an important place in economic theory. Because something is limited, we need to make decisions regarding how we use and allocate our resources. Since we are unable to have everything we desire, we must make choices on how we will use our resources. A variable cost varies with the amount produced, while a fixed cost. The marginal and incremental cost concepts are needed in deciding whether a firm needs to expand its production or not. In this way, managerial economics is considered as economics applied to problems of choice or alternatives and allocation of scarce resources by the firms. Basic concepts and principles as a novice, economics seems to be a dry social science that is laced with diagrams and statistics. Knowledge of and insight into these economic principles are important since.
Let us discuss here some important concepts of the two categories. Production and costs important questions for class 12 economics concept of cost function. The lecture notes are from one of the discussion sections for the course. Marginal cost is the increase in total cost that results from increasing production by one unit of output. Based on the theory of firm, these principles explain various cost concepts, output response to inputs and the use of inputsresources to maximize profits and or minimize costs. Chapter 2 cost concepts and design economics free download as powerpoint presentation. What is ppf in economics concept, assumptions, shifts. Economics discusses the economic problems and economic activities and indicates proper solution to these problems. Principles of production economics and cost concepts. The amount of money that a producer receives in exchange for the sale proceeds is known as revenue.
In order to understand the cost function well, in this article, we will look at various cost concepts. Cost concept of accounting play accounting explanation. To understand the process of price determination and the forces behind supply, we must understand the nature of costs. The deficiencies of cost benefit analysis also emerge from these principles, and these issues are also observed in this article.
Cost curves or cost concepts in economics authorstream. It is defined as the cost that results from a one unit change in the production rate. There is always a tradeoff involved in any decision you make. In economics, variable costs and fixed costs are the two main costs a company has when producing goods and services. Economics, is fond of saying there is no such thing as a free lunch. The concept of business cost is similar to the accounting or actual cost. Thus, it is uncertain if the concept is adopted in practices by managers and executives. However, economics has an impact on every moment of our lives because, at its heart, it is a study of choices and why and how we make them. Cost concepts and design economics marginal cost output. Cost theory derives other cost measures, which can be useful for firms that are planning to scale production up or down. Economics is an idea which make a relationship between scarce means and unlimited wants. Basics of managerial economics cost analysis and estimation pathways to higher education 21 2 economies of scope concept exploiting economics of scope at q 15000, profit will be maximized at the following calculated.
Some of the most important decisions pertaining to business often relate to the cost of production, instead of physical resources themselves. Concept of ppf in economics assumptions production possibility curve 2. Cost it refers to the expenditure incurred by a producer on the factor as well as nonfactor inputs for a given amount of output of a commodity 2. Opportunity cost is your second choicewhat you give up when you make a decision. Marginal costs and marginal revenue are key concepts in mainstream economic. Basic economic concepts athens university of economics and. What that means is that in a world of scarcity, everything has an opportunity cost. Managerial economics applies microeconomic theories and techniques to management decisions. A list and definition of different types of economic costs fixed, variable, total, marginal, sunk, accounting, opportunity cost. The average cost concept is significant for calculating the per unit profit. Cost function a cost function shows the functional relationship between output and cost of production.
It is used for analyzing the cost of a project in short and long run. A firm earns or makes economic profit only when besides covering various costs of operation, a firm is also able to earn more than its opportunity cost or its possible earnings under the. The, short run average cost curve falls in the beginning, reaches a minimum and then begins to rise. These types of cost do not directly affect the level of production but may vary with change in production facilities e. In order to begin our discussion of economics, we first need to understand 1 the concept of scarcity and 2 the two branches of study within economics. Opportunity cost refers to the loss of earnings due to opportunities foregone due to scarcity of resources. Economies of scale refer to the cost advantage experienced by a firm when it increases its level of output. Cost of producing a good, in economics is the sum total of all the, a. Here, costs include imputed value of the entrepreneurs own resources and services, as well as the salary of the ownermanager. In the above case, the private cost for giga dye and chemicals limited is rs. Dec 07, 2019 production and costs important questions for class 12 economics concept of cost function. Concept of opportunity cost is closely related to the concept of economic profit or economic rent. Units of output total cost average cost marginal cost shirts rs.
The term cost is most widely used as the money cost of production which relates to the money expenditure of a firm on. This field of knowledge is known as production economics and cost principles, and includes aspects such as the production function, the law of diminishing returns, marginalism and cost concepts and relations. They consist of material extracted from chapters 5 and 6 of the book pricing communication networks. The greater the quantity of output produced, the lower the perunit fixed cost. Cost refers to the amount of expenditure incurred in acquiring some thing the expenditure incurred to produce an output or provide service thus the cost incurred in connection with raw material, labour, other heads constitute the overall cost of production a managerial economist must have a clear understanding of the different cost concepts for clear business. Sometimes, basic concepts of economics are referred to as basic elements of economics. Total cost it refers to the total cost of production.
It is very useful in long term cost calculations e. Cost, in common usage, the monetary value of goods and services that producers and consumers purchase. The advantage arises due to the inverse relationship between perunit fixed cost and the quantity produced. What is ppf in economics concept, assumptions, shifts, ppf. This is sum total of various business expenses of giga such as cost of raw material, salaries and wages overhead expenses and selling and distribution expenses. Macroeconomics deals with the performance, structure, and behavior of an economy as a whole.
Economies of scale definition, types, effects of economies. Principles of production economics and cost concepts objectives to explain the production function, the law of diminishing returns and marginalism in simple language. Therefore, the firm must know the perunit c ost or the average cost. Business costs include all the expenses which are incurred in carrying out a business. To indicate how the most profitable production level optimum production can be achieved. Jun 04, 2019 cost cbse notes for class 12 micro economics cbse notescbse notes micro economicsncert solutions micro economics introduction this chapter gives a detailed version of cost and its types, related numericals and the relationship between them. Mar, 2019 there are five basic principles of economics that explain the way our world handles money and decides which investments are worthwhile and which ones arent. Sep 30, 2019 under cost concept of accounting, an asset should be recorded on its cost in which it was purchased regardless of its market value e. One implication is that the concept is poorly taught in textbooks and classrooms from. The concept is based on the fundamental fact that factors of production are scarce and versatile. The opportunity cost of investing in a healthcare intervention is best measured. Under this concept stability in prices of assets while recording is achieved. It is all about the financial aspects of production. Lets understand the general concept of costs for that.
In the context of project evaluation a cost benefit test is a. The concept was first developed by an austrian economist, wieser. Directtraceable costs and indirectuntraceable costs. Analytical cost concepts used in economic analysis of business. Want may be defined as an insatiable desire or need by human beings to own goods or services that give satisfaction. Economics also discuses about the value judgment of human actions and behavior. Graphically, the atc c urve is derived in the same way as the savc. Further discussion investigates highprofile issues in the economic assessment of environmental affects and the economic effects on sectors linked to waterprojectimpacted sectors. Since resources are scarce relative to needs,1 the use of resources in one way pre vents their use in other ways.
This section provides lecture notes from the course. Managerial economics is a discipline that combines economic theory with managerial practice. Cost cbse notes for class 12 micro economics learn cbse. Different cost concepts an overview economics discussion. The accounting concept is a historical concept and records what has. Chapter 2 cost concepts and design economics cost business. Cost it refers to the expenditure incurred by a producer on the factor as well as nonfactor inputs for a given amount of output of a commodity. Besides, how economic development of the country is achieved through the means of economic planning is also included in the subject matter of economics. Direct traceable costs and indirectuntraceable costs. Basic economic concepts course notes costas courcoubetis abstract these notes are about basic concepts in economics that are needed in order to study issues of pricing information goods and telecommunication services. This is related to the concept of opportunity cost.
Hence, it is important for producers to understand cost analysis. Cost analysis is all about the study of the behavior of cost with respect to various production criteria like the scale of operations, size of output, etc. When a firm starts producing goods, it has to pay the price for the factors employed for the production. Scarcity scarcity, a concept we already implicitly discussed in the introduction to this. Economics notes opportunity cost stephen palmer, james raftery the concept of opportunity cost is fundamental to the economists view of costs. Theory of cost 7 opportunity costs the opportunity cost is the return expected from the second best use of the resources, which is foregone for availing the gains from the best use of the resources. The subtopics for each lecture are related to the chapters in the textbook. Meaning of opportunity cost and its economic significance. Marginal costs and marginal revenue are key concepts in mainstream economic thought. The total cost concept is useful in breakeven analysis and finding out whether a firm is making profit or not. Understanding the concept of logistics cost in manufacturing turun kauppakorkeakoulu turku school of economics isbn 9789522493828 turun kauppakorkeakoulu turku school of economics hannemari halinen b5 kansi s10. Read this article to learn about the meaning and concept of revenue, micro economics. Everything that helps satisfy a human need falls under this banner.35 1115 494 580 299 721 1128 703 1459 770 1338 362 392 970 560 1017 1308 128 768 182 551 487 59 1308 390 213 400 140 637 1268 952 649 1086 684 1406 1044 680 1428 1095 1040