If there is no alternative, opportunity cost is zero. Cost cbse notes for class 12 micro economics cbse notescbse notes micro economicsncert solutions micro economics introduction this chapter gives a detailed version of cost and its types, related numericals and the relationship between them. Concept of ppf in economics assumptions production possibility curve 2. Economics notes opportunity cost stephen palmer, james raftery the concept of opportunity cost is fundamental to the economists view of costs. Explain the concept of price, income, cross elasticity of demand. Cost refers to the amount of expenditure incurred in acquiring some thing the expenditure incurred to produce an output or provide service thus the cost incurred in connection with raw material, labour, other heads constitute the overall cost of production a managerial economist must have a clear understanding of the different cost concepts for clear. Economics as defined by authors of economics books paul samuelson economics the study of how people and society end up choosing, with or without use of money, to employ scarce resources that could have alternative uses to produce various commodities among various persons and groups in society. It is used for analyzing the cost of a project in short and long run. Production and costs important questions for class 12 economics concept of cost function.
The concept of cost has played a prominent role in economics for more than two centuries. The concept is useful in the determination of the relative prices of different. We study some important concepts of costs, and traditional and modern theories of cost. Macroeconomics deals with the performance, structure, and behavior of an economy as a whole. If we could measure utility, total utility would be the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period. Cost incurred for the expansion of plant, for increase in the production. Cost and costing techniques in managerial economics informatics. Additional cost incurred by the firm by producing one more units extra.
The opportunity cost of investing in a healthcare intervention is best measured. The definition set out at the turn of the twentieth century by alfred marshall, author of the principles of economics, reflects the complexity underlying economics. Concept of opportunity cost is closely related to the concept of economic profit or economic rent. The concept of economic effectiveness has often been interpreted in an ambiguous manner. Scarcity is the condition in which our wants are greater than our limited resources. Cost which changes in accordance with production change. Cost, in common usage, the monetary value of goods and services that producers and consumers purchase. Economics module 3 cost and revenue producing goods and services 76 notes we can express the above example in the form of a table as follows. The ppc can also demonstrate the level of efficiency an economy is operating at. Cost curves or cost concepts in economics authorstream presentation. Continue reading concepts of economic costs we have discussed the.
Normal profit is a necessary minimum earning which a firm must get to remain in its present occupation. Concept of cost of production by cost of production is meant the total sum of money required for the production of a specific quantity of output. Costbenefit analysis is the examination of a decision in terms of its consequences or costs and benefits. Cost of producing a good, in economics is the sum total of all the, a. Describe the steps and criteria in demand forecasting.
The concept of eff ectiveness is often used in economics. Managerial economics applies microeconomic theories and techniques to management decisions. Ppf primarily represents a hypothetical boundary between the maximum combination of goods and services that an economy can produce with the available resources and technology. Explain the concept of opportunity cost and explain why accounting profits and economic profits are not the same. However, the following aspects are said to generally fall under business economics.
Chapter 3 basic economic concepts mit opencourseware. In economics, cost of production has a special meaning. According to the orthodox view, the cost of any choice is the most favorable alternative which the individual gives up in making the choice. We will examine first a concept of cost which has some claim to orthodoxy, and after that consider the concept of real cost which was held by jevons and marshall. In these days of everincreasing costs the majority of promoters of building work are insisting on projects being designed and executed to give maximum value for money. The cost of workers rises with the level of output. What is ppf in economics concept, assumptions, shifts. They consist of material extracted from chapters 5 and 6 of the book pricing communication networks. The concepts of long run and short run are closely related to the concepts of. The concept of opportunity cost is one of the most important ideas in economics. The concept of business cost is similar to the accounting or actual cost.
The term cost is most widely used as the money cost of production which relates to the money expenditure of a firm on. Cost cbse notes for class 12 micro economics learn cbse. Perrow opportunity cost is the amount of the next best produce that must be given up using the same resources in order to produce a commodity. A list and definition of different types of economic costs fixed, variable, total, marginal, sunk, accounting, opportunity cost. The opportunity cost of any action is therefore measured by the value of the most favorable alternative. It is all of the payments or expenditures necessary to obtain the factors of production of land, labor, capital and management.
Example of cost concepts y tfc tvc tc afc avc atc mc 10 30 48 65 81 96 108 116 120 117 1600 2000 2200 2600 3200 4000 5000 6200 7600 2000 2600 3000 3200 3600 4200 5000 6000 7200 8600 100 33. The concept is also useful for taking shortrun decisions. You will learn things like the distinction between absolute and comparative advantage, how to identify comparative advantage from differences in opportunity costs, and how to apply the principle of comparative advantage to determine the basis on which mutually advantageous trade can. For example, earning more money may require working more hours, which costs more leisure time. Basic economic concepts course notes costas courcoubetis abstract these notes are about basic concepts in economics that are needed in order to study issues of pricing information goods and telecommunication services. It is more limited in scope as compared to microeconomics. Basic economics concepts macroeconomics khan academy. Economists use cost theory to provide a framework for understanding how individuals and firms allocate resources in such a way that keeps costs low and benefits high. In this unit, youll learn fundamental economic concepts like scarcity, opportunity cost, and supply and demand.
Think about the last lecture you attended at your college. Write a short note on pure, perfect, monopolistic, oligopoly competition. Opportunity cost is the cost concept to use when the supply of inputs is strictly limited and when there is an alternative. What that means is that in a world of scarcity, everything has an opportunity cost.
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. Economics, is fond of saying there is no such thing as a free lunch. Cost function a cost function shows the functional relationship between output and cost of production. Explain the concept of cost and discuss various types of costs. By cost of production is meant the total sum of money required for the production of a specific quantity of output. One implication is that the concept is poorly taught in textbooks and classrooms from. However, for one and the same activity, profit does not necessari ly have to be the same number under different points of view. Be able to explain and calculate average and marginal cost to make. Land refers to the physical space on which production takes place, as well as the natural resources found under it or on it, such as oil, iron, coal, and lumber. Hopefully this shows you how a simplified model can demonstrate the concept of opportunity cost.
Units of output total cost average cost marginal cost shirts rs. As regards the scope of business economics, no uniformity of views exists among various authors. Cost accountants usually define costs as resources sacrificed or foregone to obtain benefit in any form. Thus, it is uncertain if the concept is adopted in practices by managers and executives. Managerial economics notes pdf 2020 mba geektonight. Cost it refers to the expenditure incurred by a producer on the factor as well as nonfactor inputs for a given amount of output of a commodity 2. Anything produced in the economy comes, ultimately, from some combination of these resources. Most importantly, in the classical era, costs specifically, the longrun. Since we are unable to have everything we desire, we must make choices on how we will use our resources. Economics, therefore, is a social science, which examines people behaving according to their selfinterests. Pdf a definition of the concept of economic effectiveness. The higher a consumers total utility, the greater that consumers level of satisfaction. The shadow price of a good measures the net impact on social welfare of a unit increase in the supply of that good by the public sector.
There is always a tradeoff involved in any decision you make. Cost control aims at ensuring that resources are used to the best advantage. The concept of profit in accounting and economics in general, the term profit stands for the difference between revenue and costs. First, a distinction is made between a efficiency in the production of goods and services and b. Important questions for class 12 economics concept of cost. A core economic concept is that getting something requires giving up something else. Economics is an idea which make a relationship between scarce means and unlimited wants. Meaning of opportunity cost and its economic significance.
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