Scribd
Upload
264 views17 pages

Cost-Output Relationship Explained

The document discusses cost-output relationships in the short run and long run. In the short run, costs are analyzed using average fixed cost, average variable cost, and average total cost as output increases. Average fixed cost decreases with more output while average variable cost first decreases then increases. Average total cost initially decreases as average variable cost declines, but then increases as average variable cost rises more than the decrease in average fixed cost. In the long run, all factors are variable and costs are analyzed using total cost, average cost, and marginal cost only. The combination of short run situations forms the long run industry cost curve.

Uploaded by

Anonymous 1ClGHbiT0J
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
264 views17 pages

Cost-Output Relationship Explained

The document discusses cost-output relationships in the short run and long run. In the short run, costs are analyzed using average fixed cost, average variable cost, and average total cost as output increases. Average fixed cost decreases with more output while average variable cost first decreases then increases. Average total cost initially decreases as average variable cost declines, but then increases as average variable cost rises more than the decrease in average fixed cost. In the long run, all factors are variable and costs are analyzed using total cost, average cost, and marginal cost only. The combination of short run situations forms the long run industry cost curve.

Uploaded by

Anonymous 1ClGHbiT0J
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Cost-output Relationship

[Link]
Cost-output relationship has 2 aspects:

 Cost-output relationship in the short run,


 Cost-output relationship in the long run

 The SR is a period which doesn’t permit


alterations in the fixed equipment (machinery ,
building etc) & in the size of the org.

 The LR is a period in which there is sufficient time


to alter the equipment (machinery, building, land
etc.) & the size of the org. output can be increased
without any limits being placed by the fixed factors
of production [Link]
Cost-output Relationship In The Short
Run

[Link]
Short Run may be studied in terms of

 Average Fixed Cost

 Average Variable Cost

 Average Total cost

[Link]
 Total, average &  Fixed cost & variable
marginal cost cost

1. Total cost (TC) = TFC + TVC, [Link] fixed cost (TFC) =


rise as output rises cost of using fixed factors
= cost that does not
change when output is
2. Average cost (AC) =
changed, e.g.
TC/output

2. Total variable cost (TVC) =


3. Marginal cost (MC) = change
cost of using variable
in TC as a result
factors = cost that
of changing output by one changes when output is
unit changed,

[Link]
Average Fixed Cost and Output

 The greater the output, the lower the fixed cost


per unit, i.e. the average fixed cost.

 Total fixed costs remain the same & do not


change with a change in output.

[Link]
Average Variable Cost and output

 The avg. variable costs will first fall & then rise as more &
more units are produced in a given plant.

 Variable factors tend to produce somewhat more


efficiently near a firm’s optimum output than at very low
levels of output.

 Greater output can be obtained but at much greater avg


variable cost.

 E.g. if more & more workers are appointed, it may


ultimately lead to overcrowding & bad org. moreover,
workers may have to be paid higher wages for overtime
work.
[Link]
Average Total cost and output

 Average total cost, also known as average costs,


would decline first & then rise upwards.

 Average cost consists of average fixed cost plus


average variable cost.

 Average fixed cost continues to fall with an


increase in output while avg. variable cost first
declines & then rises.
[Link]
 So , as Avg. variable cost declines the Avg.
total cost will also decline. But after a point
the Avg. variable cost will rise.

 When the rise in AVC is more than the drop in


Avg. fixed cost that the Avg. total cost will
show a rise.

[Link]
[Link]
Cost-output Relationship In The
Long-Run

[Link]
 long run period enables the producers to change
all the factor & he will be able to meet the
demand by adjusting supply. Change in Fixed
factors like building, machinery, managerial staff
etc..

 All factors become variable in the long run.

 In the long run we have only 3 costs i.e. total


cost, Average cost & Marginal Cost

[Link]
1. Total cost (TC) = TFC + TVC, rise as output rises

2. Average cost (AC) = TC/output

3. Marginal cost (MC) = change in TC as a result


of changing output by one unit

[Link]
 When all the short run situations are combined, it
forms the long run industry.

 During the SR, Demand is less & the plant’s


capacity is limited. When demand rises, the
capacity of the plant is expanded.

 When SR avg. cost curves of all such situations are


depicted, we can derive a long run cost curve out
of that.

 We can make a LR cost curve by joining the


tangency points of all SR curves
[Link]
 We use long run costs to decide scale issues, for example
mergers.

 In the long run, we can build any size factory we wish,


based on anticipated demand, profits, and other
considerations.

 Once the plant is built, we move to the short run.


Therefore, it is important to forecast the anticipated
demand. Too small a factory and marginal costs will be
high as the factory is stretched to over produce.

 Conversely too large a factory results in large fixed costs


(e.g.. air conditioning, or taxes) and low profitability.
[Link]
[Link]
Thank You

[Link]

You might also like