Economics · Chapter 3
Study notes aligned to the official NEB syllabus.
Cost of production is the total expenditure incurred by a firm on the factors of production and other inputs used to produce a given output. The study of how cost changes as output changes is essential for understanding how a firm decides its level of production and price. This chapter explains the main cost concepts and the shape and relationship of the short run cost curves.
Fixed cost is the cost that does not change with the level of output in the short run, such as rent of the building, salaries of permanent staff, interest on capital and insurance. These costs have to be borne even when output is zero.
Variable cost is the cost that changes directly with the level of output, such as expenditure on raw materials, wages of casual labour, fuel and power. Variable cost is zero when output is zero and rises as output rises.
Total cost (TC) is the sum of total fixed cost and total variable cost.
$$TC = TFC + TVC$$
The short run is a period in which at least one factor is fixed, so both fixed and variable costs exist. In the long run all factors are variable, so all costs are variable and there is no fixed cost.
Cost of production is the total expenditure incurred by a firm on the factors of production and other inputs used to produce a given output. The study of how cost changes as output changes is essential for understanding how a firm decides its level of production and price. This chapter explains the main cost concepts and the shape and relationship of the short run cost curves.
Fixed cost is the cost that does not change with the level of output in the short run, such as rent of the building, salaries of permanent staff, interest on capital and insurance. These costs have to be borne even when output is zero.
Variable cost is the cost that changes directly with the level of output, such as expenditure on raw materials, wages of casual labour, fuel and power. Variable cost is zero when output is zero and rises as output rises.
Total cost (TC) is the sum of total fixed cost and total variable cost.
The short run is a period in which at least one factor is fixed, so both fixed and variable costs exist. In the long run all factors are variable, so all costs are variable and there is no fixed cost.