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Book No. – 3 (Economics)
Book Name – Principles of Microeconomics (HL Ahuja)
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1. THE CONCEPTS OF COST
1.1. Accounting Costs and Economic. Costs
1.2. Opportunity Cost
1.3. Short Run and Long Run Defined
1.4. Short Run Costs: Total Fixed and Variable Costs
2. THE SHORT-RUN AVERAGE COST CURVES
3. MARGINAL COST (MC)
4. THE RELATION BETWEEN THE AVERAGE AND MARGINAL COST CURVES
5. DERIVATION OF LONG-RUN AVERAGE COST CURVE
6. WHY LONG-RUN AVERAGE COST CURVE IS OF U-SHAPE?
6.1. Why does LAC fall in the beginning. Economies of Scale
6.2. Economies of Scope
6.3. Why does LAC Rise Eventually? Diseconomies of Scale
6.4. Long-Run Average Cost Curve in Case of Constant Returns to Scale
6.5. Saucer-Shaped Long-run Average Cost Curve
7. DERIVATION OF LONG-RUN MARGINAL COST CURVE
8. EXTERNAL ECONOMIES AND DISECONOMIES AND COST CURVES
8.1. External Diseconomies
9. LEARNING CURVE
10. TECHNOLOGICAL CHANGE AND LONG-RUN COSTS CURVES
10.1. Endogenous Technological Change
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Cost of Production and Cost Curves: Short Run And Long Run
Chapter – 20
- The laws of returns studied earlier determine the production conditions of goods, which influence the supply of goods.
- This chapter focuses on how the cost of production changes with the level of output.
- The relationship between cost and output is called the cost function.
- The cost function of a firm depends on:
- Production conditions
- Prices of factors used in production
- The cost incurred by a firm depends on the level of output.
- The quantity of a product offered for supply in the market is influenced by the cost of production for various levels of output.
- Cost of production is a key factor governing the supply of a product.
- It is assumed that a firm chooses a factor combination that minimises cost for a given level of output.
- Cost minimisation: For any level of output, the firm produces at the minimum cost possible.
- In microeconomic theory, there are two types of cost functions:
- Short-run cost function
- Long-run cost function
- The short-run and long-run cost curves are derived from these cost functions.
- The chapter proceeds to explain the various cost concepts used in economic theory and then derives the short-run and long-run cost curves.
THE CONCEPTS OF COST
Accounting Costs and Economic Costs
- Entrepreneur undertakes production by paying prices for the factors used (wages, raw materials, rent, interest on borrowed money).
- An accountant includes only the payments made to suppliers of productive factors in the cost of production.
- An economist’s view of cost differs:
- Includes the normal return on money capital invested by the entrepreneur, which could have been earned if invested elsewhere.
- Includes the wages/salary the entrepreneur could have earned if selling services to others.
- Includes the rewards for other factors owned by the entrepreneur and employed in the business.
- Accountants focus on explicit costs, which are the direct cash payments to others (wages, rent, raw materials, etc.).
- Economists focus on economic costs, which include:
- Explicit costs (as considered by accountants).
- Implicit costs (normal return on capital, wages/salary the entrepreneur could have earned, and other rewards for the entrepreneur’s own resources).
- Economic Costs = Accounting Costs + Implicit Costs
- A firm earns economic profits when total revenue exceeds both accounting costs and implicit costs.
- When the firm is in a no profit, no loss position, its revenue equals the total of accounting costs and implicit costs.
- Economic Profits = Total Revenue – Economic Costs