class 12 microeconomics production cost notes

 Production Cost..........short and easy notes for board exam.

1. What do you mean by production cost?
> The expenditure made on factor of production to produce final product is called cost of production.
C = f(O)

2. What do you mean by money cost?
> Cost of production measure in term of money is called money cost. Money cost is the monetary expenditure on factors of production.
Following item included in money cost;

• Expenditure on raw material.
• Wages and salaries.
• Expenditure on indivisible big machines.
• Interest paid on capital.
• Rent, i.e., payment to land/building owner.
• Depreciation.
• Management expenses.
• Advertisement expenses.
• Transportation expenses.
• Payment made to insurance companies.
• Normal profit.
• Fuel expenses.

Money cost = explicit cost + implicit cost + normal profit

3. What do you mean by explicit cost?
> Cash paid to outsider by the firm for their services and goods, is called explicit cost.
Following items are included in explicit cost;

• Expenditure on raw material.
• Wages.
• Interest payment.
• Rent of building.
• Advertisement expenses.
• Insurance expenses.

4. What do you mean by implicit cost?
> The cost not directly paid to the outsider is called implicit cost. It is the cost of the own services in production process.
Following items are included in implicit cost;

• Remuneration of owner.
• Interest on capital.
• Rent of the owner house.
• Normal profit.

5. What do you mean by normal profit?
> The minimum return which the entrepreneur must receive to continue the production process, is known as normal profit. If the entrepreneur doesn't get this minimum amount, he stops the production process.

6. What do you mean by fixed cost?
> Total expenditure incurred by the producer on fixed factors of production, is called fixed cost.
i.e., rent of building, machinery cost, salaries of manager, etc.

7. What do you mean by variable cost?
> Variable cost are the expenditure incurred by the producer on the use of variable factors of production.
i.e., cost of raw material, wages to casual labour, power expenses, etc.

8. What is total cost?
> It is the sum of all expenditure incurred by the producer in production process.
e.g., Total cost = Total Fixed Cost + Total Variable Cost
or, TC = TFC + TVC

9. Write the difference between fixed cost and variable cost.
> Fixed cost;

• It is related to fixed factors of production.
• Fixed cost remains unchanged with increase or decrease in production.
• Fixed cost remain unchanged at the zero production level.
• TFC curve is parallel to x-axis.
• It appear only in short period.

Variable cost;

• It is related to variable factors of production.
• Variable cost increases with increase in production and decrease with decrease in production.
• Total variable cost becomes zero at zero production level.
• TVC curve is inverse shaped.
• It appeared in both short and long term period.

10. What do you mean by average cost? Why in short run AC curve in U shaped?
> Average cost is per unit cost of production. It is the total cost divided by per unit.
AC = TC / Q
or, AC = AFC + AVC
or, Average Cost = Average Fixed Cost + Average Variable Cost

                            Law of variable proportion applied in short period. In the beginning, due to increasing returns, cost declines and after that cost becomes constant and rising due to constant and decreasing returns respectively appearing in production process. These three faces of changing returns in short period cause three changes in cost in short period which make average cost curve U shaped.



POINTS;

• Following are included in money cost; Explicit cost + implicit cost + normal profit.
• Alternative name of opportunity cost is economic cost.
• The shape of average cost curve is U shaped.
• Fixed cost is not founded in long term period.
• Per unit cost of production is called average cost.
• MCn = TCn - (TCn-1)

THE END