Lesson Note on Cost Concepts: Meaning, Types of Cost and Cost Curves for SS 2

Class: Senior Secondary School 2 (SS2 / SSS2)
Term: First Term
Week: 7
Age: 16 years
Duration: 45 minutes
Subject: Economics
Curriculum Theme: Theory of the Firm (Production and Costs)
Previous Lesson: Production Possibility Curve: Productivity and Law of Variable Proportion.
Topic: COST CONCEPTS
Subject Matter: Meaning of cost (resources sacrificed to produce goods and services), total cost, average cost, marginal cost, fixed cost, variable cost, different cost curves.

Specific Objectives

By the end of the lesson, pupils should be able to:

Cognitive Domain:

• Define cost in economics.
• Distinguish between fixed and variable costs.
• Identify and explain total cost, average cost, and marginal cost.

Affective Domain:

• Appreciate the importance of understanding cost concepts for business decision-making.
• Show interest in analyzing different cost structures of firms.

Psychomotor Domain:

• Calculate different cost values from given data.
• Sketch and label basic cost curves.

Social Domain:

• Discuss how different cost concepts apply to real-world business scenarios.

Reference Materials

The following resources were used in planning this lesson:

• Senior Secondary Schools Education Curriculum
• State Unified Scheme of Work
• Adeyemi, S. (2018). Economics for Senior Secondary Schools. Ibadan: University Press PLC.

Instructional Materials

The teacher will teach this lesson with the aid of:

• Graphs illustrating cost curves
• Whiteboard/Chalkboard
• Markers/Chalk
• Textbooks

Rationale for the Lesson

Understanding cost concepts is important for pupils to grasp how firms make production decisions and determine prices. It helps them analyze the financial health and operational efficiency of businesses in the economy.

Prerequisite/Previous Knowledge

Pupils have a basic understanding of production, factors of production, and the concept of a firm in economics.

Lesson Content/Board Summary

COST CONCEPTS

Meaning of Cost

In economics, cost refers to the value of resources sacrificed or used up in the process of producing goods and services. It is what a firm gives up to acquire inputs for production.

Types of Cost

• Fixed Cost (FC) or Total Fixed Cost (TFC): These are costs that do not change with the level of output in the short run. They are incurred even when output is zero.

  Examples: Rent for factory, salaries of administrative staff, insurance premiums, depreciation of machinery.

• Variable Cost (VC) or Total Variable Cost (TVC): These are costs that change directly with the level of output. They are zero when output is zero and increase as output increases.

  Examples: Cost of raw materials, wages of production workers, fuel for machines.

• Total Cost (TC): This is the sum of total fixed cost and total variable cost at any given level of output.

  Formula: TC = TFC + TVC

• Average Fixed Cost (AFC): This is the total fixed cost divided by the total quantity of output produced. AFC decreases as output increases.

  Formula: AFC = TFC / Quantity (Q)

• Average Variable Cost (AVC): This is the total variable cost divided by the total quantity of output produced. AVC typically decreases initially, then increases (U-shaped).

  Formula: AVC = TVC / Quantity (Q)

• Average Total Cost (ATC): This is the total cost divided by the total quantity of output produced. It can also be calculated as the sum of AFC and AVC. ATC is typically U-shaped.

  Formula: ATC = TC / Quantity (Q) OR ATC = AFC + AVC

• Marginal Cost (MC): This is the additional cost incurred when one more unit of output is produced.

  Formula: MC = Change in Total Cost (ΔTC) / Change in Quantity (ΔQ) OR MC = Change in Total Variable Cost (ΔTVC) / Change in Quantity (ΔQ)

Cost Calculations (Worked Example)

Given the following data for a firm, let’s calculate the different cost concepts:

Calculation for Quantity (Q) = 2:

Step 1: Calculate Total Cost (TC)

• TC = TFC + TVC = 100 + 90 = ₦190

Step 2: Calculate Average Fixed Cost (AFC)

• AFC = TFC / Q = 100 / 2 = ₦50.00

Step 3: Calculate Average Variable Cost (AVC)

• AVC = TVC / Q = 90 / 2 = ₦45.00

Step 4: Calculate Average Total Cost (ATC)

• ATC = TC / Q = 190 / 2 = ₦95.00 (Alternatively, ATC = AFC + AVC = 50 + 45 = ₦95.00)

Step 5: Calculate Marginal Cost (MC)

• MC = (TC at Q=2 – TC at Q=1) / (Q=2 – Q=1) = (190 – 150) / (2 – 1) = 40 / 1 = ₦40

Cost Curves

The relationship between cost and output can be represented graphically:

• Total Fixed Cost (TFC) Curve: A horizontal line, indicating it remains constant regardless of output level.
• Total Variable Cost (TVC) Curve: Starts from the origin (0 output, 0 TVC), initially increases at a decreasing rate, then increases at an increasing rate.
• Total Cost (TC) Curve: Starts at the TFC level on the vertical axis (when Q=0), and runs parallel to the TVC curve.
• Average Fixed Cost (AFC) Curve: Continuously slopes downwards from left to right, approaching but never touching the horizontal axis (asymptotic).
• Average Variable Cost (AVC) Curve: U-shaped, initially decreases, reaches a minimum point, then increases.
• Average Total Cost (ATC) Curve: U-shaped, lies above the AVC curve, and also decreases, reaches a minimum, then increases.
• Marginal Cost (MC) Curve: U-shaped, intersects both the AVC and ATC curves at their respective minimum points. The MC curve rises faster than the AVC and ATC curves after intersecting them.

Teaching Methods/Instructional Techniques

Discussion, Lecture, Demonstration, Question and Answer, Visual Aids

Instructional Procedures

Step 1: Introduction

Time: 5 minutes
Teaching Skill: Set Induction
Teacher’s Activity: The teacher asks pupils what they understand by “cost” in their daily lives, relating it to expenses when buying things or running a small business.
Pupils’ Activity: Pupils share their ideas of cost from personal experiences.
Learning Point: Pupils recall prior knowledge of cost and are prepared for the lesson.

Step 2: Meaning of Cost

Time: 5 minutes
Teaching Skill: Explanation
Teacher’s Activity: The teacher explains the economic definition of cost as the value of resources sacrificed to produce goods and services, distinguishing it from mere money spent.
Pupils’ Activity: Pupils listen attentively and take notes on the definition of cost.
Learning Point: Pupils understand the economic meaning of cost.

Step 3: Types of Cost – Fixed and Variable Costs

Time: 7 minutes
Teaching Skill: Elucidation
Teacher’s Activity: The teacher explains and provides examples of fixed costs (e.g., rent, salaries of permanent staff) and variable costs (e.g., raw materials, casual labour wages).
Pupils’ Activity: Pupils identify and differentiate between fixed and variable costs with examples.
Learning Point: Pupils can distinguish between fixed and variable costs.

Step 4: Total, Average, and Marginal Costs

Time: 8 minutes
Teaching Skill: Definition and Formula Derivation
Teacher’s Activity: The teacher defines Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost, and Marginal Cost, writing their formulas on the board.
Pupils’ Activity: Pupils copy the definitions and formulas into their notebooks.
Learning Point: Pupils know the definitions and formulas for different cost concepts.

Step 5: Illustrating Cost Concepts with a Table and Calculation

Time: 8 minutes
Teaching Skill: Demonstration/Application
Teacher’s Activity: The teacher uses the provided table to demonstrate step-by-step calculations for TC, AFC, AVC, ATC, and MC, explaining each step carefully.
Pupils’ Activity: Pupils follow the calculations and attempt to calculate values for other output levels.
Learning Point: Pupils can calculate various cost concepts from given data.

Step 6: Cost Curves

Time: 7 minutes
Teaching Skill: Visualisation/Drawing
Teacher’s Activity: The teacher sketches the shapes of the TFC, TVC, TC, AFC, AVC, ATC, and MC curves on the board, explaining their characteristics and relationships.
Pupils’ Activity: Pupils observe the sketches and ask questions for clarification.
Learning Point: Pupils understand the graphical representation of different cost curves.

Step 7: Evaluation/Review

Time: 5 minutes
Teaching Skill: Questioning/Assessment
Teacher’s Activity: The teacher evaluates the learning by asking the following questions:

1. Define cost in economics.
2. Differentiate between fixed cost and variable cost, giving two examples for each.
3. State the formula for calculating Average Total Cost (ATC).
4. If Total Cost (TC) is ₦500 at 10 units of output and ₦580 at 11 units of output, calculate the Marginal Cost (MC).

Pupils’ Activity: Pupils answer orally and in writing.
Learning Point: Pupils demonstrate understanding of the lesson.

Step 8: Conclusion

Time: 0 minutes
Teaching Skill: Summarization
Teacher’s Activity: The teacher summarizes the key points of the lesson and gives an assignment: “Draw and label the Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC) curves on a single graph.”
Pupils’ Activity: Pupils note down the assignment.
Learning Point: Pupils review the lesson and prepare for further practice.

Lesson Keywords

• Cost – Value of resources sacrificed in production.
• Fixed Cost – Costs that do not change with output in the short run.
• Variable Cost – Costs that change directly with output.
• Total Cost – Sum of fixed and variable costs.
• Average Cost – Cost per unit of output.
• Marginal Cost – Additional cost of producing one more unit.
• Cost Curves – Graphical representation of cost relationships.

Differentiation

For struggling learners, the teacher will provide simplified examples and extra guidance during calculations. Advanced learners will be encouraged to discuss the implications of different cost structures on firm behavior and market entry/exit decisions.

Note for teachers using this lesson plan

Ensure pupils grasp the distinction between short-run and long-run costs, though the focus here is primarily on short-run costs. Emphasize the shapes and relationships of the cost curves, as these are frequently examined. Encourage pupils to draw and interpret graphs independently.