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CA Foundation Economics Marathon - Theory of Cost | CA Foundation Dec 2023 | CA Hardik Manchanda

CA Hardik Manchanda・103 minutes read

The class covers accounting and economic costs, including explicit and implicit costs, economic profit, and opportunity costs. Various types of costs, such as fixed, variable, and shutdown costs, are discussed, along with the behavior of average costs in the short and long run.

Insights

Economic profit is calculated by subtracting economic costs from revenue, where normal profit equates accounting profit with implicit costs, resulting in zero economic profit. Super normal profit occurs when economic profit is positive, highlighting the importance of understanding the distinction between accounting and economic costs in determining business profitability.
The behavior of average total cost depends on the interaction between average variable and fixed costs, with the rate of decline in average fixed costs being higher than the rate of increase in average variable costs. The relationship between average and marginal costs is crucial, as the minimum point of average costs occurs when marginal costs equal average costs, impacting the cost-effectiveness of production methods in the long run.

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Recent questions

What is the difference between accounting and economic costs?
Accounting costs are explicit, while economic costs include implicit costs.
How is economic profit calculated?
Economic profit is revenue minus economic costs.
What is the concept of opportunity cost?
Opportunity cost refers to the value of the next best alternative foregone.
How do fixed costs impact business operations?
Fixed costs remain constant regardless of output changes.
What is the significance of the long-run average cost curve?
The long-run average cost curve helps firms choose cost-effective production methods.

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Summary

00:00

"Accounting and Economic Costs in Business"

The session begins with a greeting and a check on audio and video clarity.
The teacher plans to revise the production chapter and cover the cost in the current class.
The class aims to complete chapter two and three, with chapter five scheduled for the next day.
The focus of the class is on understanding accounting and economic costs.
Accounting costs refer to explicit costs, while economic costs include implicit costs.
Economic profit is calculated by subtracting economic costs from revenue.
Normal profit equates accounting profit with implicit costs, resulting in zero economic profit.
Super normal profit occurs when economic profit is positive.
The concept of opportunity cost is discussed in terms of using resources for business.
Direct costs are identifiable with the product, while indirect costs are incremental and hesitant.

13:33

"Costs: Key Factors in Business Success"

Cost acts as a barrier to entry for firms into business.
Research and development are essential to start a business.
Research and development involve expenses and are crucial for business success.
Historical cost refers to the price at which assets were purchased.
Replacement cost signifies the cost of replacing old assets.
Private cost refers to business expenses, while social cost includes expenses incurred by society due to business activities.
Fixed costs remain constant regardless of output changes.
Shutdown costs are incurred when a business is temporarily closed.
Programmed costs are necessary expenses for business operations.
Variable costs fluctuate with changes in output levels.

25:17

Understanding Fixed and Variable Costs in Business

Fixed cost is a necessary expense that must be paid.
After fixed costs, variable costs come into play.
Additional expenses may arise if extra resources are used.
Total cost is the sum of fixed and variable costs.
Semi-variable and semi-fixed costs are important to understand.
The concept of "stay step" involves fixed costs for a period followed by variable costs.
An example with teachers and students illustrates cost implications.
The need for additional resources when demand increases is highlighted.
The relationship between cost and output is crucial.
Short run cost function involves fixed and variable costs, with total cost being the sum of both.

38:06

Understanding Fixed and Variable Costs in Business

Fixed cost gap is total cost minus total variable cost, equaling fixed cost.
Fixed costs are crucial in starting up a business.
Total fixed cost remains constant at zero output level.
Variable cost per first unit is 50.
Total cost at 1050 includes fixed cost of 1000 and variable cost of 90.
Total variable cost is 1090.
Costs rise as output increases due to the Law of Variable Proportions.
Stage one involves Increasing Returns to Factors.
Average Fixed Cost decreases as output increases due to efficiency.
Average Variable Cost decreases initially, then increases due to the Law of Variable Proportion.

51:00

Cost Behavior and Production Efficiency in Economics

Fixed costs and average costs behave similarly; if fixed costs decrease, average costs also decrease.
Average variable costs initially decrease, while average fixed costs always decrease.
The behavior of average total cost depends on the behavior of average variable and fixed costs.
If average variable costs increase while average fixed costs decrease, average total costs will increase.
The rate of decline in average fixed costs is higher than the rate of increase in average variable costs.
The relationship between average and marginal costs is crucial; when marginal costs are lower than average costs, average costs decrease.
The minimum point of average costs occurs when marginal costs equal average costs.
In the long run, all factors are variable, allowing firms to choose the most cost-effective production methods.
Long run production aims to achieve the lowest possible cost for a given output level.
Short run average cost curves represent different plant capacities, with firms choosing the most cost-effective option for production.

01:04:55

Plant Allocation Decisions for Biscuit Production

There are 100 biscuits available for allocation.
SAC is assigned to plant one and also to plant A2.
The choice between A1 and SAC is discussed for 100 biscuits.
For 150 biscuits, SAC is recommended.
For 200 biscuits, SAC 3 is suggested.
Long-run planning involves selecting plants based on output levels.
The long-run average cost curve is crucial for plant selection.
The LAC curve should be tangent to the SAC curve at a larger output level.
Underutilization of plants occurs when production is below optimal levels.
The shape of the LAC curve is influenced by the return to scale concept.

01:17:21

"Cost Curves and Economies of Scale"

Traditional Economic Analysis is contrasted with Empirical Evidence, showing a shift towards practical evidence.
Long run Average Cost curve is discussed, noting it is L-shaped instead of Y-shaped.
The concept of increasing returns to scale at the start of a business is explored.
The observation that costs do not always increase as a business grows is highlighted.
Modern firms are noted to face an L-shaped cost curve as they expand.
The distinction between economy and diseconomy is explained, focusing on the benefits and drawbacks of growth.
Internal economy is detailed as the advantages accruing to a firm due to its growth.
External economy is described as the benefits shared by all members of an industry as it expands.
Technical economies and diseconomies are discussed, emphasizing the impact of technology on efficiency and costs.
Managerial economies and diseconomies are outlined, showcasing the challenges and solutions related to business growth and management.

01:30:47

"Industry Growth Impacts Business Operations and Costs"

Diversification can lead to losses if values are not aligned with business activities.
Focusing on one business is often more beneficial than spreading resources across multiple ventures.
Internal and external economies and diseconomies impact business operations.
Industry growth leads to easier access to raw materials at lower prices.
Technological advancements and innovations follow industry growth.
Skilled labor availability increases in growing industries.
Supporting industries, like transportation and marketing, grow alongside the main industry.
Government regulations may restrict industry growth in certain areas.
Input prices increase with industry growth, affecting transportation and marketing costs.
Preparation and focus are key to success in exams, with a balanced study routine recommended.

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