MEANING OF: Cost, Implicit Cost, Explicit Cost, Total Cost (TC), Average Cost (AC), Marginal Cost (MC),Fixed Cost (FC), Variable Cost (VC) NEB GRADE 12 ECONOMICS

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1. Cost

Cost refers to the expenses incurred by a business in the production of goods or services. It includes payments for resources such as labor, raw materials, machinery, rent, etc.

2. Implicit Cost

Implicit costs are the opportunity costs of using resources owned by the business itself instead of renting or selling them to others. These costs do not involve actual cash outflows but represent the benefits sacrificed.

Example:

  • A person runs a business in a building they own. The implicit cost is the rent they could have earned if they had leased the building instead.
  • A business owner working in their own company without taking a salary has an implicit cost, which is the salary they could have earned working elsewhere.

3. Explicit Cost

Explicit costs are the direct, out-of-pocket expenses that a business pays for production. These involve actual cash payments.

Example:

  • Salaries paid to employees
  • Rent for office space
  • Payment for raw materials
  • Electricity bills

4. Total Cost (TC)

Total cost is the sum of all costs incurred in production, including both fixed and variable costs.

Total Cost (TC)=Fixed Cost (FC)+Variable Cost (VC)\text{Total Cost (TC)} = \text{Fixed Cost (FC)} + \text{Variable Cost (VC)}

Example:

A factory has:

  • Fixed costs: $10,000 (for rent, insurance, etc.)
  • Variable costs: $5 per unit of production
    If the company produces 1,000 units, total cost =
10,000+(5×1,000)=15,00010,000 + (5 \times 1,000) = 15,000

5. Average Cost (AC)

Average cost is the total cost divided by the number of units produced. It helps in determining the cost per unit of production.

Average Cost (AC)=Total Cost (TC)Quantity (Q)\text{Average Cost (AC)} = \frac{\text{Total Cost (TC)}}{\text{Quantity (Q)}}

Example:

If a company incurs a total cost of $15,000 to produce 1,000 units:

AC=15,0001,000=15 per unit\text{AC} = \frac{15,000}{1,000} = 15 \text{ per unit}

6. Marginal Cost (MC)

Marginal cost is the additional cost incurred to produce one extra unit of a good. It is calculated as:

Marginal Cost (MC)=Change in Total Cost (ΔTC)Change in Quantity (ΔQ)\text{Marginal Cost (MC)} = \frac{\text{Change in Total Cost (ΔTC)}}{\text{Change in Quantity (ΔQ)}}

Example:

If the total cost of producing 100 units is $5,000 and increasing production to 101 units raises total cost to $5,050:

MC=(5,050−5,000)(101−100)=50\text{MC} = \frac{(5,050 - 5,000)}{(101 - 100)} = 50

This means the cost of producing one additional unit is $50.

7. Fixed Cost (FC)

Fixed costs are expenses that remain constant regardless of the level of production. These costs do not change with output in the short run.

Example:

  • Rent for factory space
  • Salaries of permanent employees
  • Insurance premiums
    Even if a company produces zero goods, it still has to pay these fixed costs.

8. Variable Cost (VC)

Variable costs change with the level of production. The more units a company produces, the higher these costs.

Example:

  • Costs of raw materials
  • Wages paid to temporary workers
  • Electricity costs for running machinery (if usage increases with production)

If a company produces zero units, variable costs will also be zero.

Summary Table

Cost Type Definition Example
Implicit Cost Opportunity cost of using own resources    Owner’s unpaid salary
Explicit Cost Direct, out-of-pocket expenses    Wages, rent, raw materials
Total Cost (TC) Sum of fixed and variable costs $15,000 for 1,000 units
Average Cost (AC) Cost per unit of production $15 per unit
Marginal Cost (MC) Cost of producing one more unit $50 for one extra unit
Fixed Cost (FC) Costs that do not change with output Rent, insurance
Variable Cost (VC) Costs that vary with production Raw materials, wages

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