Cost | Economics for JAMB PDF Download

Accountants' and Economists' Notions of Cost

Differentiation between Accountants' and Economists' Notions of Costs

Accountants and economists approach the concept of cost differently, considering various factors and objectives. Understanding their different perspectives is crucial in analyzing business and economic decisions.

1. Accountants' Notions of Cost:

• Accountants focus on financial records and preparing financial statements for a company.
• Cost, for accountants, refers to the actual expenses incurred in producing goods or services.
• They classify costs into fixed costs and variable costs.
• Fixed costs are those that remain constant regardless of the level of production, such as rent, insurance, and salaries.
• Variable costs vary with the level of production, such as raw materials and direct labor.
• Accountants aim to accurately record costs to determine the financial position and profitability of a company.
• They use historical data and past expenses to calculate costs.
• Accountants may not consider opportunity costs or economic implications.

2. Economists' Notions of Cost:

• Economists analyze costs from a broader perspective, considering both explicit and implicit costs.
• Explicit costs are the actual out-of-pocket expenses incurred in producing goods or services, similar to accountants' notion of costs.
• Implicit costs are the opportunity costs of utilizing resources in one way rather than their next best alternative.
• Opportunity costs include the foregone benefits of the next best alternative, such as the income from an alternative job or the returns from investing the resources elsewhere.
• Economists take into account both explicit and implicit costs to measure the true cost of production.
• They aim to understand the economic implications of resource allocation and decision-making.
• Economists consider future costs and make decisions based on the long-term profitability and sustainability of a company.

Interpretation of the Short-run and Long-run Costs Curves

1. Short-run Costs:

• The short-run refers to a period in which some factors of production are fixed, while others are variable.
• In the short run, a firm can adjust variable factors like labor and raw materials to respond to changes in output.
• The short-run cost curve is typically represented by the Total Cost (TC), Average Variable Cost (AVC), and Average Total Cost (ATC) curves.
• Total Cost (TC) is the sum of fixed costs and variable costs.
• Average Variable Cost (AVC) is calculated by dividing total variable costs by the quantity produced.
• Average Total Cost (ATC) is calculated by dividing total costs by the quantity produced.
• Initially, as output increases, the Average Variable Cost (AVC) decreases due to economies of scale.
• However, beyond a certain point, the Average Total Cost (ATC) starts increasing due to diminishing returns to variable factors of production.

2. Long-run Costs:

• The long run is a period in which all factors of production are variable.
• In the long run, firms have the flexibility to adjust all inputs to production, including plant size and capacity.
• The long-run cost curve represents the Minimum Efficient Scale (MES) and the Long-Run Average Cost (LRAC).
• Minimum Efficient Scale (MES) refers to the lowest level of output at which a firm can achieve the lowest possible average costs.
• Long-Run Average Cost (LRAC) curve depicts the lowest average cost at each level of output when the firm can choose the optimal combination of inputs.
• The LRAC curve is U-shaped due to economies of scale initially and diseconomies of scale beyond a certain production level.

The Marginal Cost and the Supply Curve of a Firm

Relationship between Marginal Cost and Supply Curve

1. Marginal Cost:

• Marginal cost refers to the change in total cost resulting from producing one additional unit of output.
• It is calculated by dividing the change in total cost by the change in quantity produced.
• Marginal cost represents the cost of the last unit produced and helps firms make short-term production decisions.

2. Supply Curve:

• The supply curve shows the relationship between the price of a product and the quantity that a firm is willing and able to produce and sell in the market.
• The supply curve is upward sloping, indicating that as the price increases, firms are willing to supply more quantity.
• The supply curve represents the marginal cost of production for each quantity supplied.

3. Relationship:

• The marginal cost directly influences the supply curve of a firm.
• When marginal cost is lower than the price, firms have an incentive to produce more to maximize profits.
• As the marginal cost increases, firms require a higher price to cover the additional cost of production.
• Therefore, the supply curve is positively related to the marginal cost curve.
• If marginal cost increases, the supply curve will shift upwards, resulting in a lower quantity supplied at each price level.
• Similarly, if marginal cost decreases, the supply curve will shift downwards, leading to a higher quantity supplied at each price level.