Cost analysis

2789 Words Oct 17th, 2013 12 Pages
Cost analysis

Cost concepts
1. Opportunity cost:
Opportunity cost refers to the maximum return that could be obtained from an alternative use of resources, but is unavoidable or foregone by employing the resources in their present use. Opportunity Cost is also termed as Implicit Cost.
Economic Profit = Earnings or Revenue of Firm - Economic Costs.
For example:
Mr. Subodh has two job opportunities in hand. First job opportunity can help him to earn Rs. 20, 000 per month and the second opportunity can get him Rs. 17, 000 per month. Under normal circumstances Mr. Subodh will opt for the job opportunity which can help him to earn Rs. 20, 000 per month. In the process Subodh rejects the other job opportunity which can help him to
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That is, it is the cost of producing one more unit of a good.
MC = Change in TC / Change in Q
Where, MC is marginal cost, TC is total cost and Q is quantity

Cost function
Cost function refers to the mathematical relationship between cost of production and the various determinants of costs.
C=f (O, S, T, P)
Where, C is cost of output,
O is size of output,
S is size of plant,
T is Time under consideration,
P is prices of factors of production
F is function

Determinants of costs
The various factors that influence the cost are as follows:
1. Size of output:
Cost is affected by the size of output. Whenever the level of output changes the total cost also changes. Average and marginal costs usually falls initially but rises afterwards.
2. Size of plant:
Cost is inversely related with the size of the plant. As the size of the plant increases, costs decline and as the size of the plant decreases, cost rise. Fixed costs of bigger plant are higher than that of the smaller plant.

3. Prices of input:
Higher the prices of inputs, higher will be the costs of production. Even for the manufacturer getting the raw materials at low cost will help the firm to decide the product price.

4. Period under consideration:
During short period, costs tend to rise sharply as compared
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