Friday, October 17, 2008

Learn -- Definition of Economics

Learn some definition of Economics

Q. Explain the term Production Function?

Ans. Production function refers to the relationship between input and output in physical term.

For example: If a Producer 10 k.g raw materials in the form of input and generates 8kg output is called production function

Production Function: 10:8 or 5:4

Q. Explain Cost of Production?

Ans. It refers to the money value of inputs

For example:

1. Payment of raw material
2. Payment of wages to labour
3. Payment of Interest on borrowed capital

Q. Explain Revenue?

Ans. It refers to the money value of output.

For example: If a Producer earns Rs 100/- by selling 20 units of a commodity at Rs. 5 each is called revenue.

Revenue – TQ x P

- 20 x 5 = Rs. 100

Q. Explain Actual cost?

Ans. Actual cost refers to the actual expenses incurred by the firm.

For example:

1. Payment for labour
2. Payment for Material
3. Payment for traveling and transport
4. Payment for plant, building, machinery & tools & equipments

Note:- All these expenses are included in the books of accounts for all practical purposes and thus actual cost comes under the concept of accounting cost.

Q. Explain opportunity Cost? or Explain Alternative Cost? Or Explain Sacrifice Cost?

Ans. The opportunity cost is the return expected from the second best use of the resources, which is foregone for the availing gains from the best use of the resources.

For example: Mr. A earns Income of Rs.10,000/- P.M. and he may get the Income of Rs. 12,000/- and Rs 15,000/- at different places Then he will sacrifice the income of 12,000/- for getting the income of Rs.15,000/- is called opportunity cost.

Note: Opportunity cost is associated with the concept of economic rent or economic profit.

Q. Explain the term Business Cost?

Ans. Business cost is also known as actual cost or real cost which means when all the expenses incurred by a business firm.

Q. Explain Full Cost?

Ans. Full cost is a combination of opportunity cost and normal profit.

Opportunity Cost: Expected earning from the next best use of the resources.

Normal Profit: It is a necessary minimum earning which a firm must get to remain in its present occupation.

For example: If a business firm incurred the cost of Rs. 100 in the form of fixed cost so it is necessary for it to earn at least Rs.100 in the business to remain in its occupation.

Q. Explain Explicit Costs?

Ans. Explicit cost falls under business costs.

Q. Explain the term implicit cost?


What do you understand by Imputed cost?

Ans. It refers to the cost in which the businessman does not have to pay for the services rendered by him.

For example:

A producer has land, capital for operating his business so he has not to pay rent and Interest because producer has its own assets.

Q. Explain Total Cost?

Ans. Total cost is a combination of total variable cost and total fixed cost. In other word, the expenses incurred by the producer on fixed as well as variable factors of production.


For example: Producer firm has to pay expenses of land, labour, capital in the form of Rent, wages and interest is called total cost.

Q. Explain average Cost?

Ans. When total cost is divided by the total output.



For Example: If total cost is 500 and units produced is 50 units then Ac would be 10.

Q. Explain Marginal Cost?

Ans. It refers to the change in total cost due to additional unit produced.

Your browser may not support display of this image. MC = TC

Your browser may not support display of this image. Q

Or If refers to the change in the total cost divided by the change in the total output.

For example: If a produce produced 100 units which is increased by 120 units, they marginal cost would be 20.

Q. Explain Fixed Costs?

Ans. Fixed costs are those which remains fixed for a given output.

For example:

1. Cost of managerial staff and administrative staff.
2. Depreciation of machineries, building etc.
3. Maintenance of land.

Note: The concept of fixed cost does not change with the changing level of production and is associated with short run.

Q. Explain variable costs?

Ans. Variable costs refers to the cost which varies/change which the changing level of production. It never becomes constant.

For example:

1. Cost of raw material
2. Direct labor charges associated with the level of output.
3. Cost of other inputs.
4. Cost of fuel, electricity etc

Q. Explain short run Costs?

Ans. It refers to the cost which varies with the out put but the size of the firm remains same. In other words, it is associated with variable cost.

Q. Explain long run Cost?

And. It can be defined as the costs which incurred on fixed assets like plant, building, machinery, land etc.

Q. Explain Private Costs?

Ans. Private costs are those which are actually incurred or provide for by as individual of a firm on the purchase of goods and services from the market.

For example: Implicit and explicit costs are the examples of private costs.

Q. Explain Social Costs?

Ans. It refers to the cost which is bearing by the society on account of production of a commodity.

For example:

1. Air Pollution
2. Water Pollution
3. Drainage System
4. Roadways

Q. Explain cost function? Explain the types of cost function? Or explain the traditional theory of cost of production?

Ans. Cost function is a function derived from the production function and market supply function.

Production function of a function combined with the supply function of inputs or prices of inputs determines the cost function of the firm.

Cost-output relation depends on the nature of cost function. Change in cost function cause a change in the cost-output relations.

There are two types of cost function:

1. Short run cost function
2. Long run cost function

The cost function may be symbolically represented:

C = F(Q, T,(Pf, K))

Where C = Total cost

Q = Quantity Produced

T = Technology

Pf= Factor Price

K = Capital, the fixed factor

Since, in the short run, all determinants of cost other than Q are constant, The short-run cost function may be specified as:

C = f(Q)

Following are the short run costs:

1. AVC
2. AC
3. AFC
4. MC

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