Chapter-Theory of Production, Cost and Revenue Micro Economics class 11 in english Medium CBSE Notes

Theory of Cost:

The cost of supplying the product is dermined by the productivity and the prices of inputs used.

Cost function :

• Cost functios denotes "the functional relationship between output and the cost incuured to produce it".
• It can be expressed as :

            C = f (q)

Where,

  C = cost

  q = output.

Cost concept :

Fixed Cost - The cost incurred for fixed factors of production arte called fixed cost. They do not change with a change in output. For e.g- rent of land, gate keepers salary etc.

Variable Cost - Those cost which are incurred on variable factors  are known as vaariable cost. They vary with a change in level of output. For e.g- cost of raw material. wages of labour etc.

Total Cost - It is the  sum total of fixed cost and variable cost. It can be expressed as

TC = FC+VC

Averege Cost - Per unit cost of production is termed as average cost. It is drived by dividing total cost with the number of units produced. Average cost is expressed as:

AC = Total cost / No. of units produced

Marginal Cost - It is the addition made to the total cost by producing one more unit of a commodity. It can be referred as a change in total cost with the production of an additional unit.

MC_n = TC_n - TC_n-1

Where,

MC_n = marginal cost of n^th unit

TC_n = total cost of n^th unit

TC_n = total cost of previous unit.

Short Run and Long Run Costs:

Short Run Costs - Short run is a period where both fixed and variable factors exist. Hence, in the short run the firm incurs both fixed and variable cost.

Long Run Cost: - In the long run, no factor is fixed and hence there is no fixed cost. Here total cost is equal to variable cost. i.e total cost changes in direct proportion to output. All factors are variable. Hence, all cost are also variable.

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