Cost means the total actual expenditure on inputs (explicit cost) and the imputed value of an input supplied by the owner (implicit cost). Here are the cost chapter notes class 11.
Topics Discussed
Difference between Explicit Cost and Implicit Cost
| Basis | Explicit Cost | Implicit Cost |
| Meaning | It is the payment made to outsiders for hiring factor services. | It is the cost of self-supplied factors. |
| Money Payment | It involves actual money payment on buying & hiring inputs. | No money payment is involved as it involves the imputed value of factors owned by the firm. |
| Examples | Payment of wages, rent, insurance, etc. | Rent of own land, interest on capital, etc. |
Short Run Cost
Fixed Cost (TFC)
It refers to the cost that does not vary directly with the output level. For example: Rent, interest, loan, insurance premium, etc.
| Output | Fixed Cost |
| 0 | 12 |
| 1 | 12 |
| 2 | 12 |
| 3 | 12 |
| 4 | 12 |
Variable Cost
It refers to the cost which varies directly with the level of output. For example: Raw material.
| Output | Variable Cost |
| 0 | 0 |
| 1 | 6 |
| 2 | 10 |
| 3 | 15 |
| 4 | 24 |
| 5 | 35 |
Total Cost
It is the total expenditure incurred by a firm on the factors of production required for producing a commodity. It is the total of total fixed cost and total variable cost.
TC = TFC+TVC
| 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 |
Relationship between TC, TFC, and TVC
- TFC curve is a horizontal straight line parallel to the x-axis as it remains constant at every level of output.
- TC & TVC curves are inversely S-shaped because of the Law of Variable Proportions.
- At zero output TC is equal to TFC because there is no variable cost.
- TC & TVC are parallel to each other because of constant TFC.
- The vertical distance between TFC & TC is equal to TVC. As TVC rises the distances between TFC & TC also rise.
Average Cost
There are 3 types of average cost:
1) AFC – Average Fixed Cost
2) AVC – Average Variable Cost
3) ATC – Average Total Cost
Average Fixed Cost
AFC refers to the per unit fixed cost of production.
AFC = TFC/Q
| Output | TFC | AFC |
| 0 | 12 | infinity |
| 1 | 12 | 12 |
| 2 | 12 | 6 |
| 3 | 12 | 4 |
| 4 | 12 | 3 |
| 5 | 12 | 2.4 |
- The AFC curve slopes downward.
- AFC curve is a rectangular hyperbola which means the area under the curve remains the same at all the points.
Note: The AFC curve is a rectangular hyperbola. It gets nearer to both axes but never touches any one of them.
AFC never touches the x-axis. TFC can never be zero, whereas it cannot touch the y-axis because at zero level of output, TFC is positive and any positive value divided by zero becomes an infinite value.
Production Function Class 11 Notes
Average Variable Cost
Average Variable Cost refers to the per unit variable cost of production.
AVC = TVC/Q
| Output | Total Variable Cost (TVC) | Average Variable Cost (AVC) |
| 0 | 0 | – |
| 1 | 6 | 6 |
| 2 | 10 | 5 |
| 3 | 15 | 5 |
| 4 | 24 | 6 |
| 5 | 35 | 7 |
AVC is U-shaped as it initially falls, remains constant & finally starts increasing.
Average Total Cost
It refers to the per unit total cost of production.
AC = TC/Q
AC = AVC + AFC
| Output | TC | AC |
| 0 | 12 | infinity |
| 1 | 18 | 18 |
| 2 | 22 | 11 |
| 3 | 27 | 9 |
| 4 | 36 | 9 |
| 5 | 47 | 9.4 |
Relationship between AC, AFC, and AVC
- AC & AVC are U-shaped because of the Law of Variable Proportion.
- AFC is a rectangular hyperbola which means the area under the curve remains the same at all the points.
- AC curve will always lie above AVC because AC includes both AVC and AFC.
- AVC reaches its minimum points lower than that of AC because when AVC is at its minimum point, AC is still falling because of falling AFC.
- As output increases, the gap between AC and AVC decreases but they never intersect each other because the gap between AC & AVC represents AFC which keeps on falling but never becomes zero.
Marginal Cost
Marginal Cost refers to the addition to the total cost when one more unit of output is produced.
MC = delta TC/delta Q or TCn-TC(n-1)
| Output | TC | MC |
| 0 | 12 | – |
| 1 | 18 | 6 |
| 2 | 22 | 4 |
| 3 | 27 | 5 |
| 4 | 36 | 9 |
| 5 | 47 | 11 |
MC is a U-shaped curve because it initially falls, reaches its minimum point & then starts increasing because of the Law of Variable Proportion.
All Formulas
- TC = TVC + TFC
- TC = (sigma)MC + TFC
- TVC = TC – TFC
- TVC = (sigma)MC
- TFC = TC – TVC
- AC = TC/Q
- AC = AVC + AFC
- AFC = TFC/Q
- AFC = AC – AVC
- AVC = TVC/Q
- AVC = AC – AFC
- MC = (delta)TC/(delta)Q
- MC = TCn – TC(n-1)
This was all about Cost Chapter Notes Class 11 Microeconomics. If you have any doubts related to the above, you can either join our telegram channel or ask those doubts in the comments section.
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