Micro Economics Lecture - Cost Chapter

Introduction

• In this lecture, we will study the cost chapter of 11th grade micro economics.
• To understand this chapter well, imagine yourself as a producer.

Meaning of Cost

• Cost: Expenses incurred in the production of any item.
  • Example: The expense of purchasing tires, metal, body, raw materials, etc., for producing a car.
  • Employee salaries, electricity, water, phone bills, etc., are also included in costs.

Classification of Costs

• Variable Cost: Increases with the increase in the amount of production.
  • Example: Raw materials, wages, taxes, etc.
• Fixed Cost: Not affected by the quantity of production.
  • Example: Rent, interest, depreciation, license fees.

Permanent and Temporary Employees

• Permanent Employees: With job security, salary is not affected by production.
• Temporary Employees: Salary varies based on output.

Difference between Variable and Fixed Cost

• Variable cost keeps changing while fixed cost remains constant.

Calculation of Total Cost

• Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC)
  • Example: If TFC = 60 and TVC = 25, then TC = 85

Cost Curves

• TFC Curve: Remains constant with output
• TVC Curve: Initially increases at a decreasing rate, then the rate of increase rises.
• TC Curve: Similar to TVC curve, but rising upwards.

Marginal Cost (MC)

• MC = Additional increase in TVC

Average Costs

• Average Total Cost (AC) = TC/Output
• Average Fixed Cost (AFC) = TFC/Output
• Average Variable Cost (AVC) = TVC/Output

Relationship between MC and AC/AVC

• MC cuts AC/AVC at their minimum point.
• When MC < AC, AC decreases.
• When MC > AC, AC increases.

Important Formulas and Curves

• TC = TFC + TVC
• AC = AFC + AVC
• Understanding the shapes of curves and their relationships is important.

Conclusion

• To understand costs, the distinction between fixed and variable costs should be clear.
• It is essential to understand the various types of cost curves and their shapes.
• This chapter is related to production and revenue and is important to understand.