assiments mba sikkim manipal university
Managerial Economics
Unit 6
Unit 6
Cost Analysis
Structure:
6.1
Introduction
Case Let
Objectives
6.2
Types of Costs
6.3
Cost-Output Relationship: Cost Function
6.4
Cost-Output Relationships in the Short Run
6.5
Cost-Output Relationships in the Long Run
6.6
Summary
6.7
Glossary
6.8
Terminal Questions
6.9
Answers
6.10 Case Study
Reference/E-Reference
6.1 Introduction
In the previous unit, we learnt that output does not always increase proportionately, with increase in the quantity of inputs employed in the production process. We also learnt that certain tools exist to determine the optimal combinations of inputs which can be employed to produce the desired level of output. We saw that large scale production has some advantages and disadvantages and, we also learnt about the various economies that emerge with changes in internal and external conditions. As production involves the use of inputs which are scarce, costs are incurred by the business firm while producing and delivering a good or service. As the primary objective of business firms is profit maximisation, costs need to be controlled. In this unit, we shall explore topics in cost analysis and learn about how firms can manage their costs. Costs are analysed from the producer’s point of view. Cost estimates are made in terms of money. Cost calculations are indispensable for management decisions.
In the production process, a producer employs different factor inputs. These factor inputs are to be compensated by the producer for the services in the production of a commodity. The compensation is the cost. The value of inputs required in the production of a commodity determines the cost of
Sikkim Manipal University
Page No. 145
Managerial Economics
Unit 6
output. Cost of production refers to the total monetary expenses (Both explicit and implicit) incurred by the producer in the process of transforming inputs into outputs. In short, it refers to
Unit 6
Unit 6
Cost Analysis
Structure:
6.1
Introduction
Case Let
Objectives
6.2
Types of Costs
6.3
Cost-Output Relationship: Cost Function
6.4
Cost-Output Relationships in the Short Run
6.5
Cost-Output Relationships in the Long Run
6.6
Summary
6.7
Glossary
6.8
Terminal Questions
6.9
Answers
6.10 Case Study
Reference/E-Reference
6.1 Introduction
In the previous unit, we learnt that output does not always increase proportionately, with increase in the quantity of inputs employed in the production process. We also learnt that certain tools exist to determine the optimal combinations of inputs which can be employed to produce the desired level of output. We saw that large scale production has some advantages and disadvantages and, we also learnt about the various economies that emerge with changes in internal and external conditions. As production involves the use of inputs which are scarce, costs are incurred by the business firm while producing and delivering a good or service. As the primary objective of business firms is profit maximisation, costs need to be controlled. In this unit, we shall explore topics in cost analysis and learn about how firms can manage their costs. Costs are analysed from the producer’s point of view. Cost estimates are made in terms of money. Cost calculations are indispensable for management decisions.
In the production process, a producer employs different factor inputs. These factor inputs are to be compensated by the producer for the services in the production of a commodity. The compensation is the cost. The value of inputs required in the production of a commodity determines the cost of
Sikkim Manipal University
Page No. 145
Managerial Economics
Unit 6
output. Cost of production refers to the total monetary expenses (Both explicit and implicit) incurred by the producer in the process of transforming inputs into outputs. In short, it refers to