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1.Introduction to Cost:
Economic efficiency of any firm operating in the market is determined by the ability of the firm to minimize cost and maximization the profits. Study of cost and its behavior as production pattern changes in the short run and the long run, gives useful insight into issues like: (I) How the cost pattern of a firm changes in case a firm is operating in the short run? (II) How the cost changes along with the change in the scale of production? (III) How the cost of operation can be minimized? (IV) What is the optimum level of operation of any firm (at optimum level the cost of the firm is generally reaches its minimum level)? Cost is a function of Output. As the output of a firm changes the cost pattern of a firm also undergoes change. In this module various cost concepts are being explained in detail.
II. Learning Objectives:
This model covers and explains various cost concepts which are critical and important in varied business operations and market situations. It is expected that after completion of the module the learner will be able to identify and relate to various cost aspects and concepts which any firm frequently has deal with, understand and control in the real life market situations.
III. Some Cost Concepts Used in Economic Theory (I) Opportunity Cost (II) Money Cost and Real Cost (III) Accounting Cost and Economic Cost (IV) Private Cost and Social Cost (V) Fixed Cost, Variable Cost, Average Cost and Marginal Cost
IV. Cost Concepts in Detail:
I. Opportunity Cost: The resources of any firm operating in the market are limited and investment options are many. The firm therefore has to decide or select only those investment opportunities/options which provide the firm with the best return or best income on investment. This means that if a firm can invest money/ resources only in one investment option then the firm will select that investment option which promises best return on investment to the firm. In other words while doing so the firm gives up/rejects the next best option for investing the funds. The opportunity cost of a company is thus this income/ return which the firm could have earned on the next best investment alternative. Concept of opportunity cost is closely related to the concept of Economic profit. A firm earns or makes Economic profit only when besides covering various costs of operation, a firm is also able to earn more than its opportunity cost (or its possible earnings under the next best investment alternative). Opportunity Cost is also termed as Implicit Cost