BASIC CONCEPT

    When any firm starts the process of production it has to employ different factors of production or it has to purchase the services of different factors. Consequently, the firm has to make the expenditures. The sum of such expenditures is simply known as costs of production. It also means that the costs are connected with the output produced by the firm or costs depend upon the quantity. It is as:

                                                        C = F ( Q )

where C represents costs of production while Q shows the quantity produced by the firm. Regarding making of expenditures the costs of production are divided into two main types :
(1) Expenditure costs (2) Non-Expenditure costs.

1. EXPENDITURE COSTS

    The expenditures which are really borne by the firm are given the name of expenditure costs. Accordingly, they consist of wages, charges of fuel, payments of raw material, rent of the building, transportation and advertisement expenses etc.

2. NON-EXPENDITURE COSTS

    Such expenditure which are not faced by the firm while employing different factors. Such costs are faced because the capital is owned by the firm; building is in the possession of the firm or; the owner is also the manager of the firm. Such all represent costs because if the firm rents out its building; the owner sells his services to some other firm——the incomes can be earned. Accordingly, calculating the costs of firm such like non-expenditures will also be included.

        SHORT RUN COST CONCEPTS:- TRADITIONAL ANALYSES

1. Total Fixed Costs ( TFC )

    The costs (expenditures) which a firm has to face in connection with the fixed factors of production are called TFC. Such costs have to be borne by the firm whether the firm operates or not. Such costs consist of the followings:

(1) The salaries/wages of permanent staff.

(2) The expenditures in connection with the rent of land and maintenance of building etc.

(3) Interest of capital.

    We suppose here that a firm produces 100 units of a good and TFC faced by the firm are 400. if we represent fixed factor by K and price of fixed factor by Pk. Then

                TFC = Pk . K = 400.

2. Total Variable Costs (TVC)

The costs (expenditures) which a firm has to bear in connection with the variable factors of production are called TVC. Such costs are incurred by the firm only when it produces. Such costs consist of the followings.

(1) The expenditures faced regarding the purchase of raw material.

(2) The wages of the labor.

(3) The expenditures of the firm regarding purchase of gas, fuel and electricity etc.

3. Total Costs (TC)

    If we sum TFC and TVC, we get TC. As:

                TC = TFC + TVC
                TC = KPk + LPL

4. Average Fixed Costs (AFC)

     If we divide TFC by quantity produced, we get AFC. As

                AFC = TFC/Q = K.Pk/Q

5. Average Variable Costs (AVC)

    If we divide TVC by quantity produced, we get AVC. As

                AVC = TVC/Q = L.PL/Q

6. Average Costs (AC)

   If we divide TC by the quantity produced we get AC. As

            AC = TC/Q

            AC = AFC + AVC

7. Marginal Costs (MC)

    The net change in total costs by having produced an additional unit of any good is called MC. It is as:
       

            MC = dTC/dQ