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Type of Cost in Economy :: SSC CGL & CHSL Economy

Type of Cost in Economy :: SSC CGL & CHSL Economy

Type of Cost in Economy

Dear Readers,

Here are Important Study Material of SSC CGL/CHSL Economics. You will learn the art of identifying the study material associated with it and with the help of this article, You can develop your abilities & gain experience. This will be very helpful for those candidates who are preparing for SSC CGL exam.

 

Explicit Cost –

  • is the money expenditure incurred on the resources used in the production of a commodity.
  • These are also known as paid out costs, expenditure costs and also as outlay costs.

Implicit Cost –

  • Is the costs of self-owned and self-employed resources, which if employed else-where were being paid.
  • These include interest on capital employed by entrepreneur in his firm, rent of building owned by entrepreneur, reward for his managerial skills.
  • These are non-expenditure costs also called as imputed cost.
  • Opportunity cost is an example of imputed cost.
  • The explicit and implicit costs together make the economic cost.

Social Cost –

These are the costs that arise due to the production of the firm but they are not borne by the firm but

They are borne by the society.

  • This cost includes

– (i) the use of natural resources freely available, and

– (ii) The dis-utility created in the process of production.

– These cost together constitute social cost, also termed as external costs.

Example is the chemical factories discharging its waste in rivers, air pollution created by chimneys of the firm, etc.

Resources used are atmosphere, rivers, land etc.

Real Cost –

  • Efforts, pains and exertions of labour along with wait and abstinence required by entrepreneur for saving the capital used in making a commodity.
  • It is a subjective type of cost introduced by Marshall.

Incremental Cost –

  • Increase in total cost on an increase in the level of operations is called the incremental cost.
  • This cost is associated with the decisions to expand the output or to add a new variety of product or to replace worn out plant and machinery.
  • It is also termed as differential cost and it does not apply to a new firm but applies to existing firm only.

Fixed Cost (FC) –

  • Are costs incurred on production firm which is fixed in short-run irrespective of the volume of output level.
  • These are incurred even if production comes tohault.
  • These include office over heads, depreciation on machinery, building, maintenance of firm
  • Fixed costs are also known as general costs, supplementary costs and indirect costs.

Variable Cost (VC) –

  • Also known as prime costs or direct cost, it varies with the variation in the volume of total output.
  • It includes cost of raw material, running cost of fixed capital, direct labour charges and costs of all other inputs that vary with output.

Total Cost (TC)

  • It is the sum of fixed costs and variable cost. TC = FC + VC
  • Total cost curve TC moves parallel to total variable cost curve (TVC) because difference between TC and TVC is FC which remains constant.

diagram-1

Average Variable Cost (AVC) –

  • AVC declines at initial stage due to law of increasing returns.
  • It becomes constant when firm attains its full capacity; AVC starts to increase due to application of law of diminishing returns.
  • Thus, AVC gets “U” Shape in long-run.
  • Same is applicable to Average Cost Curve.
  • It is also U shaped.

diagram-2

Type of Cost Function-

Short-run Cost Functions

Types of Cost
The shape of the short run cost curves depends on the type of cost functions.

Relation between MC (Marginal Cost) and AC (Average Cost) Curve

  • Both AC and MC are derived from total cost.
  • So as far as AC falls, MC falls more sharply MC < AC
  • MC curve cuts AC curve from below at the minimum. This is point of optimum capacity.
  • When AC increases, MC also increases but at a more pace, i.e., MC > AC after intersection.
  • MC reaches its minimum level sooner than AC.
  • Thus, just before the point of inter section, MC must be rising while AC is falling but
  • MC curve must be below the AC curve.

diagram-3

 

Long run Cost Curve

Long-run is a period characterized by changing factors of production, fixed as well as variable.

The firm plans to produce more by building a new large plant by changing the production technique.

Laws of return to scale applies

diagram-9

  • Each plant capacity has its own Short-run Average Cost Curve (SAC).
  • In long-run, there can be a large number of plants as well as their SACs.
  • LAC curve is a U shaped curve enveloping all the SACs.
  • LAC curve is flatter, smooth and is tangent to all the SAC at its minimum point.
  • It is also called envelope curve
  • Long-run Average Cost Curve (LAC) helps the firm to determine an optimum scale of operation which incurs least cost and maximum profit.

 

Margin of Safety (MoS) –

  • It is the difference between actual sales and the breakeven point sales.
  • It is the range of sales over and above the break even sales.
  • If the difference is big, it implies that the firm can still make profits even after a serious drop in production.diagram-10

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