NIOS Economics (318) Notes/Answer| Chapter-18| Cost

NIOS Economics (318) Notes/Answer| Chapter-18| Cost. Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-18| Cost.

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-18| Cost

Intext Questions

1. Fill in the blanks using appropriate word from the choices given in bracket:

(a) Paid out cost is ____________ (explicit cost, implicit cost).

Ans. explicit cost

(b) Cost as used in business refers to ____________ (imputed cost, money cost)

Ans. money cost

(c) Imputed cost is compensation for ____________ (hired factors, self-owned and self-employed inputs).

Ans. self-owned and self-employed inputs

(d) Cost in microeconomics includes ____________ (money cost only, imputed cost only, both money cost and imputed cost).

Ans. both money cost and imputed cost 

(e) Normal profit____________ a part of cost of production in microeconomics (is, is not).

Ans. is

2. Some of the cost elements of a publisher are given below. Allocate them into money cost and imputed cost: 

  1. his own land 
  2. expenditure on papers, ink electricity etc. 
  3. expenditure on printing machine 
  4. insurance premium 
  5. payments of wages and salaries to workers 
  6. his own building where he prints the book and 
  7. expenditure on transport to bring raw material like paper, ink etc.

Ans. Money cost: 

(ii) expenditure on papers, ink electricity etc. (iii) expenditure on printing machine 

(v) payments of wages and salaries to workers (vi) his own building where he prints the book and 

(vii) expenditure on transport to bring raw material like paper, ink etc.

Imputed cost: 

(i) his own land and 

(iv) insurance premium 

3. State whether the following statements are true or false:

(a) With increase in the quantity of output fixed costs increase.

Ans. False

(b) There are no variable costs at zero output.

Ans. True

(c) Expenses incurred on watchmen and property tax are fixed costs.

Ans,. True

(d) Variable costs change with every change in output.

Ans. True

(e) Cost incurred on all the labour is variable.

Ans. False

4. Fill in the blanks with appropriate words given in the brackets:

(a) Changes in total cost when output varies are due to changes in ____________ (fixed cost, variable cost). 

Ans. variable cost

(b) To find total cost we have to ____________total variable cost (add, multiply).

Ans. add

(c) Total cost ____________ Zero at zero output (is, is not)

Ans. is not

(d) When output is zero, total cost equals ____________ (fixed cost, variable cost). 

Ans. fixed cost

5.Fill in the blanks with appropriate words given in the brackets:

(a) Average cost is ____________ (cost per unit, cost incurred on additional unit). 

Ans. cost per unit

(b) To find total cost we have to____________average cost by quantity of output (multiply, divide) 

Ans. multiply

(c) Average fixed cost.____________with the increase in output (falls, rises).

Ans. falls

(d) Average total cost is the sum of ____________ and .(average fixed cost, average variable cost, variable cost, fixed cost).

Ans. average fixed cost, average variable 

6. Fill in the blanks

(a) Marginal cost is the ____________cost incurred on additional units of output.

Ans. additional

(b) Marginal cost equals the change in total cost or the change in ____________ Per unit change in output.

Ans. total variable cost 

(c) Costs increase from 3 units to 4 units. As a result TC rises from Rs. 19.60 to Rs.24.50. MC is ____________.

Ans. Rs.4.90

Terminal Exercise

1. What is the imputed cost? How is it different from paid out costs? 

Ans. An imputed cost, also called an implicit cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production of which it already owns and thus does not pay rent.

The following are the major differences between pai out costs and imputed cost

  1.  Paid out costs are incurred when the entity has to pay for the utilisation of factors of production. Imputed Cost is the opportunity cost, which is incurred when the entity uses the owner’s resources like capital inventory etc. 
  2. Paid out costs are also known as explicit while Imputed costs are known as implicit costs.
  3. Paid out costs can be easily ascertained, but it is just the opposite in the case of Imputed Cost as it does not have any paper trail.
  4. The measurement of Paid out costs is objective in nature because it is actually incurred whereas Imputed Cost occurs indirectly and that is why its measurement is subjective.
  5. Paid out costs helps in the calculation of both accounting profit and economic profit. Conversely, Imputed Cost helps in the calculation of only economic profit. 
  6. Paid out costs are recorded and reported to the management. On the other hand, the Imputed Cost is neither recorded nor reported to the management of the company.

2. What is the paid out cost? Distinguish it from imputed cost. 

Ans. A firm purchases the services of assets like building machines etc. It pays hiring charges for building, normally termed as rent. It employs workers, accountants, managers etc. and pays wages and salaries to them. It borrows money and pays on it. It purchases raw material, pays electricity bills and makes interest such other payments. All such actual payments, on purchasing and hiring different goods and services used in production are called paid out costs or explicit costs.

The following are the major differences between paid out costs and imputed cost

  1. Paid out costs are incurred when the entity has to pay for the utilisation of factors of production. Imputed Cost is the opportunity cost, which is incurred when the entity uses the owner’s resources like capital inventory etc.
  2. Paid out costs are also known as explicit while Imputed costs are known as implicit costs. 
  3. Paid out costs can be easily ascertained, but it is just opposite in the case of Imputed Cost as it does not have any paper trail.
  4. The measurement of Paid out costs is objective in nature because it is actually incurred whereas Imputed Cost occurs indirectly and that is why its measurement is subjective.
  5. Paid out costs helps in the calculation of both accounting profit and economic profit. Conversely, Imputed Cost helps in the calculation of only economic profit.
  6. Paid out costs are recorded and reported to the management. On the other hand, the Imputed Cost is neither recorded nor reported to the management of the company.

3. Explain the concept of ‘normal profit’. Justify that it is an element of cost in microeconomics.

Ans. Normal profit is an additional amount over the monetary and imputed cost that must be received by an entrepreneur to induce him to produce the given product. Normal profit is the entrepreneur’s opportunity cost and therefore enters into the cost of production. Opportunity cost is the value of the opportunity or alternative that is sacrificed. You may be wondering how it is that profit is an element of cost. We will try to convince you. 

For that let us first understand the meaning of the term “normal profit. It is nothing but the minimum assured profit in the next best occupation. Normal profit is the reward which an entrepreneur must receive for the risk and uncertainties he bears in the production of a commodity. It can be understood with an example. Suppose there is a publisher who has the option of publishing commerce books or science books. He chooses to publish commerce books because he gets higher return from these. Now, suppose that the market for science books is more assured but profit is lower. This would mean that the publisher who is publishing commerce books is sacrificing an assured return on science books and is taking a risk. He would be prepared to face the risk only when he thinks that he would be able to get at least the same profit which he would have in any way got from science books. Loss of assured return on science books is then an element of cost for the publisher who is publishing commerce books instead of science books. It is termed as ‘normal profit’ because it is an estimate of the minimum expectations of a producer from a business. So long as he gets this minimum, he will continue to publish commerce books. If, at any stage, he does not get this amount, he will shift to the publication of science books. So, in order that a producer continues to produce a commodity he must get normal profit in addition to recovering his ‘explicit cost’ and ‘implicit cost’. As we now come to know that minimum expectation of a producer from a business is also an element of cost.

There are three elements of the total cost of production in microeconomics 

  1. Explicit costs
  2. Implicit costs and 
  3. Normal profits.

In business accounts only explicit costs are treated as cost. Let us consider an example of the total cost elements for a farmer. He requires following inputs to produce, say rice; a piece of land; agricultural workers; tools and implements; tractor and harvester; water, seeds, manures, power, and many other things. He will either provide these inputs himself or he will purchase them from the market. Suppose; some of these inputs he provides himself and some of these he purchases from the market (see the following chart).

Chart Showing the Cost Elements for a Farmer

4. Explain the various elements of cost in microeconomics. 

Ans. Following are the various elements of cost in micro economics:

(a) Paid-out Costs (Money Costs)

A firm purchases the services of assets like buildings, machines etc. It pays hiring charges for building, normally termed as rent. It employs workers, accountants, managers etc. and pays wages and salaries to them. It borrows money and pays interest on it. It purchases raw material, pays electricity bills and makes such other payments. All such actual payments, on purchasing and hiring different goods and services used in production are called ‘explicit costs”.

Normally, in business, the accountant takes into account only the actual money expenditure as cost. So in business the cost is normally the paid-out or explicit cost only. 

(b) Imputed costs (Implicit costs):

Many times, we find that all inputs are not always bought or hired by the producer from the market. Some of the inputs are provided by the entrepreneur or producer himself. He may use his own building. He may invest his own money in the business. He may be the manager of his own firm. A farmer may cultivate his own land. If a producer had taken a building from another production unit, he would have paid rent. In the same way, if he had borrowed money he would have paid a certain amount of interest. Similarly, if he had engaged a manager he would have paid him a salary. But he is not paying these amounts explicitly i.e. (rent for his building, interest on his money and salary for his services) because he has contributed them for his own business. So market value of these self-owned and self-supplied inputs must be calculated. It is, therefore, a cost to the producer. We can make an estimate of these costs on the basis of their prevailing market prices. Let us term such costs as implicit costs or imputed costs (to distinguish them from explicit costs). These are also termed as imputed costs. One example of such cost is the imputed rent of the self-owned factory building. It can be taken as equivalent to the actual rent paid for a similar type of building. Similarly, we can find out imputed interest and imputed wages.

In microeconomics, in addition to the paid out cost, imputed cost is also included in the cost of production. This is not all. There is yet another element of cost described as ‘normal profits’.

(c) Normal profit as an element of cost:

Another component of cost is ‘normal profit’. Normal profit is an additional amount over the monetary and imputed cost that must be received by an entrepreneur to induce him to produce the given product. Normal profit is the entrepreneur’s opportunity cost and therefore enters into the cost of production. Opportunity cost is the value of the opportunity or alternative that is sacrificed. We may be wondering how it is that profit is an element of cost. We will try to understand it.

For that let us first understand the meaning of the term ‘normal profit’. It is nothing but the minimum assured profit in the next best occupation. Normal profit is the reward which an entrepreneur must receive for the risk and uncertainties he bears in the production of a commodity. It can be understood with an example. Suppose there is a publisher who has the option of publishing commerce books or science books. He chooses to publish commerce books because he gets higher return from these. Now, suppose, that the market for science books is more assured but profit is lower. This would mean that the publisher who is publishing commerce books is sacrificing an assured return on science books and is taking a risk. He would be prepared to face the risk only when he thinks that he would be able to get at least the same profit which he would have in any way got from science books. Loss of assured return on science books is then an element of cost for the publisher who is publishing commerce books instead of science books. It is termed as ‘normal profit’ because it is an estimate of the minimum expectations of a producer from a business. So long as he gets this minimum, he will continue to publish commerce books. If, at any stage, he does not get this amount, he will shift to the publication of science books. So, in order that a producer continues to produce a commodity he must get normal profit in addition to recovering his ‘explicit cost’ and ‘implicit cost’. As we now come to know that minimum expectation of a producer from a business is also an element of cost. 

There are three elements of the total cost of production in microeconomics

  1. Explicit or Paid-out costs
  2. Implicit or imputed costs and
  3. Normal profits.

In business accounts only explicit costs are treated as cost. 

Let us consider an example of the total cost elements for a farmer. He requires following inputs to produce, say rice; a piece of land; agricultural workers; tools and implements; tractor and harvester; water, seeds, manures, power, and many other things. He will either provide these inputs himself or he will purchase them from the market. Suppose; some of these inputs he provides himself and some of these he purchases from the market (see the following chart).

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

5. Differentiate between the concept of cost as used in business and in microeconomics. 

Ans. There are three elements of the total cost of production in microeconomics

  1. Explicit or Paid-out costs 
  2. Implicit or imputed costs and
  3. Normal profits.

In business accounts only explicit costs are treated as cost. Let us consider an example of the total cost elements for a farmer, He requires following inputs to produce say rice; a piece of land; agricultural workers; tools and implements; tractor and harvester; water, seeds, manures, power, and many other things. He will either provide these inputs himself or he will purchase them from the market. Suppose; some of these inputs he provides himself and some of these he purchases from the market.

6. Distinguish between fixed costs and variable cost with suitable examples

Ans. The differences between fixed cost and variable cost in economics are 

  1. Fixed Cost is the cost which does not vary with the changes in the quantity of production units. Variable Cost is the cost which varies with the changes in the number of production units.
  2. The Fixed cost is time-related, i.e. it remains constant over a Unlike Variable Cost which is volume related, i.e. it changes with the change in volume.
  3. Fixed Cost is definite; it will incur even when no units are produced. Conversely, Variable Cost is not definite; it will incur only when the enterprise does some production.
  4. Fixed cost changes per unit. On the other hand, variable cost remains constant per unit.
  5. Examples of fixed cost are rent, tax, salary, depreciation, fees, duties, insurance, etc. Examples of variable cost are packing expenses, freight, material consumed, wages, etc.
  6. Fixed Cost was not included at the time of valuation of inventory, but variable cost is included.

7. Explain the relationship between output and average fixed cost.

Ans. Average fixed cost is obtained by dividing total fixed cost by the number of units of output produced. AFC=TFC/Units of output

Thus, Average Fixed Cost is per unit fixed cost in producing a commodity or fixed cost per unit of output.

Fixed cost by definition remains fixed whatever the level of output is. Therefore, as production expands the total fixed cost is distributed over a larger number of units. As a result average fixed cost falls with every increase in output. For example, the total fixed cost of our producer is 60 when he produces one unit. Average fixed cost is Rs.60 (Rs.60%1) but if the production is increased to 2 units, average fixed cost is Rs.30 (Rs.60%2). When he produces 3 units it is Rs.20 (Rs.60 ÷ 3). Therefore, the larger the output the lower will be the average fixed cost.

8. Distinguish between AFC and AVC and describe how these are calculated

Ans. Difference between AFC and AVC are

  1.  Average fixed cost is obtained by dividing total fixed cost by the number of units of output produced. Whereas Average variable cost is obtained by dividing the total variable cost by the units of output produced
  2. Average Fixed Cost is per unit fixed cost in producing a commodity or fixed cost per unit of output. Average variable cost is per unit variable cost in producing a commodity or variable cost per unit of output.     

Calculations of AFC and AVC are as follows:      

Average fixed cost is obtained by dividing total fixed cost by the number of units of output produced. Average fixed cost can be calculated by the formula given below AFC=TFC/Units of output      

Average variable cost is obtained by dividing the total variable cost by the units of output produced. Average variable cost can be calculate by the formula given below 

AVC=TVC/Units of output

9. Explain the term marginal cost. Show with the help of examples how these are calculated. 

Ans. Marginal cost is the additional cost incurred for the production of an additional unit of output.

The word marginal should be taken to mean additional. For example, Marginal cost of producing a level of output is the addition to the total cost or total variable cost caused by producing an extra unit of output.

= – – 1 or = – – 1

To explain how it is calculated, look at the following Table.

Output of pens (1 unit = 100 pens)Total cost (Rs.)Marginal cost (Rs)
060
112060
216040
321050
4320110
5450130

When output level is zero, total cost is Rs.60. As one unit of pen is produced by the producer the total cost rises to ‘ 120.

So the marginal cost of producing one unit of output is Rs.60 (Rs.120- Rs.60). When it produces 2 units his total cost increases to Rs.160; the marginal cost at 2 units of output is Rs.40 (Rs.160-Rs.120). This has been calculated by deducting the total cost of 1 unit from the total cost of 2 units. Marginal cost at one unit of output is Rs.60. This we got by deducting the total cost of zero unit from the total cost of one unit. It should be kept in mind that marginal cost is dependent on the variable cost only. It is not affected by fixed cost because fixed cost remains constant. As output expands, changes in total cost are due to changes in variable cost only. So, marginal cost can also be calculated if only total variable costs are known to us. For example, the table given below shows TFC, TVC and TC. When we calculate MC from either TC or TVC we get the same result. Calculate yourself and the check the result.

Output of pens (1 unit = 100 pens)Total cost (Rs)TFC (Rs)TVC (Rs)MC (Rs)
060600
1120606060
21606010040
32106015050
432060260110
545060390130

10. Which cost, fixed or variable, determines marginal cost? Give reasons.

Ans. It should be kept in mind that marginal cost is dependent on the variable cost only. It is not affected by fixed cost because fixed cost remains constant. As output expands, changes in total cost are due to changes in variable cost only. So, marginal cost can also be calculated if only total variable costs are known to us.

11. Classify the following expenditure into paid-out costs and imputed costs: 

(a) A farmer growing seeds and using them for cultivation

Ans. Ans. Implicit costs

(b) Use of chemical fertilizers by a farmer.

Ans. Explicit costs

(c) Use of the services of a tractor owned by the farmer.

Ans. Implicit costs

(d) Farming by the farmer who owns the land .

Ans. Implicit costs.

(e) Unpaid family labour used on farms

Ans. Implicit costs

(f) Transport charges

Ans. Explicit costs 

(g) Interest on borrowings

Ans. Explicit costs

(h) Wages paid

Ans. Explicit costs

(i) Use of own building for production

Ans. Implicit costs 

(j) Excise duty.

Ans. Explicit costs

12. Classify the following expenditure into fixed cost and variable cost:

(a) Rent of the factory building

Ans. Fixed cost

(b) Wages to watchman

Ans. Fixed cost

(c) Annual licensing fee of factory premises

Ans. Fixed cost

(d) Raw material 

Ans. Variable cost

(e) Rent of the agricultural land

Ans. Fixed cost 

(f) Seeds

Ans. Variable cost

(g) Fertilizers

Ans. Variable cost

(h) Interest on borrowings

Ans. Fixed cost

(i) Excise duty

Ans. Variable cost

(j) Transport charges. 

Ans. Variable cost

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