Page 142 - DECO405_MANAGERIAL_ECONOMICS

Unit 8: Cost Analysis

Incremental costs: Costs that are defined as the change in overall costs that result from particular Notes
decision being made.
Indirect costs: Costs which cannot be separated and clearly attributed to individual units of
production.
Opportunity costs: The return from the second best use of the firm's resources which the firm
forgoes in order to avail itself of the return from the best use of the resources.

Shut-down costs: Costs incurred when the production operations are suspended and will not be
incurred, if the production operations continue.
Sunk costs: Costs that are not affected or altered by a change in the level or nature of business
activity.
Variable costs: Costs which are incurred on the employment of variable factors of production
whose amount can be altered in the short-run.
8.10 Self Assessment

1. State true or false for the following statements:
(a) Past cost are unadjusted historical cost data which have been recorded in the books.
(b) Incremental costs include only variable cost.

(c) Replacement costs means the price that would have to be paid currently for acquiring
the same plant.
(d) Explicit costs cannot be regarded as paid out costs.
(e) Actual costs are also called absolute costs or outlay costs.

(f) Average cost is obtained by dividing the total cost by the total quantity produced.
(g) Fixed costs can be altered in short run.
(h) Social cost is the total cost to the society on account of production of a good.
2. Fill in the blanks:

(a) Shut-down costs are required to be incurred when the production operations are
.......................... .
(b) Economic costs can be calculated at two levels .......................... .

(c) Marginal cost is the extra cost of producing .......................... .
(d) AVC first .......................... , reaches a minimum and rises thereafter.
(e) Implicit costs are the costs which go unrecognized by the ................. .
(f) Capital equipment is a .............. factor.
(g) The total cost concept is useful in ................ analysis.
(h) Direct costs are ................ costs.

8.11 Review Questions

1. What type of cost is depreciation – Direct cost or Indirect cost? Support your argument
with reasons.
2. What types of costs would you incur if you have to organise a musical concert in your city?

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