COMPETENT COMMERCE

CLASSES
By:-Rohit Maheshwari

CLASS-XI
SESSION-2023-24

ECONOMICS
By-Anubhav Awasthi

TOPIC- 7
CONCEPT
OF
COST
Student Name :-________________________
School:-______________________________
-Cost :- Cost means the sum total of actual expenditure on input(explicit cost)
and the imputed value of the inputs supplied by the owners(implicit cost).
COST = EXPLICIT + IMPLICIT
- Explicit cost :- It is the actual money expenditure on inputs or payment made
to outsiders for hiring their factor services . ex- payment for raw material , salary
or wages to employees etc.
- Implicit cost :- It is the estimated value of the inputs supplied by the owners
including normal profit .ex- Rent of own land etc.
- Cost function :- It refers to the functional relationship between cost and output.
The relation between cost and output is known as cost function .
C = f(Q)
-Types of Cost :-
1-Total Fixed Cost (TFC) 2- Total Variable Cost (TVC)
3-Total Cost (TC) 4- Average Fixed Cost (AFC)
5-Average Variable Cost (AVC) 6-Average Cost (AC)
7-Marginal Cost (MC)

I-Total Fixed Cost :- It refers to those cost which do not change (Vary) directly
with the change in level of output.
Ex- Interest on loan , rent on premises etc.
-It is also known as supplementary cost , overhead cost , indirect cost , general
cost and unavoidable cost .
-TFC curve is a horizontal straight line parallel to x axis because TFC remains
same at all levels of output, even the output is zero .

II-Total Variable cost :- It refers to those cost which change directly with level
of output . Such cost are incurred till there is production and become zero at zero
level of output .
Ex- Payment for raw material , power , fuel etc.
-It is also known as Prime cost , direct cost , avoidable cost .
-TVC Curve is inversely S shaped due to Law of variable proportion
-It starts from origin indicates , when output is zero , variable cost is also zero .

III-Total cost :- It is the total expenditure incurred by the firm on the factors of
production required for the production of a commodity .
-It is the sum of total fixed cost and total variable cost at various levels of output.
-Since TFC remains same at all levels of output , the change in TC is entirely due
to TVC.
-TC is also inversely S shaped curve due to Law of variable proportion .

-Relationship between TC , TVC & TFC :-

Output TFC TVC TC
0 12 0 12
1 12 6 18
2 12 10 22
3 12 15 27
4 12 24 36
5 12 35 47

1-TFC curve is a horizontal straight line parallel to X-axis as it remains same at

all levels of output.
2- Both TC & TVC curves are inversely-S shaped because they rise initially at a
decreasing rate, then at a constant rate and finally , at an increasing rate .
3- At zero output TC is equal to TFC because there is no variable cost at zero
level of output .So both TC & TFC starts from same point.
4- The vertical distance between TFC curve and TC curve is equal to TVC . As
TVC rises with increases in the output , the distance between TFC & TC curves
also goes on increasing .
5- TC & TVC curves are parallel to each other and the distance between them
remains the same at all levels of output because the gap between them represents
TFC , which remains same at all levels of output .

IV-Average Fixed Cost :- It refers to the per unit fixed cost of production .It is
calculated by dividing TFC by total output.
AFC = TFC/Q
-AFC fall with increase in output as TFC remains same at all levels of output.
-AFC is a rectangular hyperbola i.e., area under the AFC curve remains same at
different points.
- AFC curve can never be zero or can never touch X or Y axis because TFC can
never be zero .

V-Average Variable Cost :- It refers to the per unit variable cost of production.
AVC = TVC/Q
-AVC initially falls with increase in output , once the output rises till optimum
level AVC starts rising.
-AVC is a ‘U’ shaped curve as it initially falls and then remains constant for a
while and finally, it starts increasing.

VI-Average Cost :- It refers to the per unit total cost of production. It is the sum
of AFC & AVC.
AC = TC/Q or AC= AVC + AFC
-AC initially falls with increase in output , once the output rises till optimum
level AC starts rising.
-AC is a ‘U’ shaped curve as it initially falls and then remains constant for a
while and finally, it starts increasing.

-Relationship between AC , AVC & AFC :-

Output TFC TVC TC AFC AVC AC
0 12 0 12 - - -
1 12 6 18 12 6 18
2 12 10 22 6 5 11
3 12 15 27 4 5 9
4 12 24 36 3 6 9
5 12 35 47 2.40 7 9.40
1-AFC is a rectangular hyperbola curve which continuously falls but never
touches X axis because AFC can never be zero as TFC can never be zero.
2-Both AC & AVC are “U” Shaped curves .As they initially falls then after
reaching a minimum point they tends to rise.
3-AVC reaches its minimum point at a level of output lower than that of AC
because when AVC is at its minimum point, AC is still falling because of falling
AFC.
4-As the output increase, the gap between AC & AVC curves decrease , but they
never intersect each other. It happens because the vertical distance between them
is AFC , which can never be zero.

VII-Marginal Cost :- It refers to an addition to Total cost when one more unit of
output is produced .
MCn =TCn – TCn-1 Or MCn =TVCn – TVCn-1
-MC is independent pf TFC because TFC is constant .Hence MC is only affected
by change in TVC.
-MC is also U shaped curve.

-Relationship between AC & MC :-

Output TFC TVC TC AFC AVC AC MC
0 12 0 12 - - - -
1 12 6 18 12 6 18 6
2 12 10 22 6 5 11 4
3 12 15 27 4 5 9 5
4 12 24 36 3 6 9 9
5 12 35 47 2.40 7 9.40 11

1-When MC is less than AC , then AC falls with increase in output.

2-When MC is equal to AC , then AC reaches its minimum point.
3-When MC is more than AC , then AC starts rising with increase in level of
output.
4-MC curve is steeper as compared to AC curve.
5-Both MC & AC curve are derived from TC curve.

-Relationship between TC & MC :-

1-When MC declines, then TC rises at a diminishing

rate .
2-When MC reaches its minimum point (k) the TC
becomes constant.
3-When MC starts rising , then TC rises at an
increasing rate .

Space for Additional Notes :-

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