Cost Output Relationship In Short Run And Long Run Pdf


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18.04.2021 at 18:06
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cost output relationship in short run and long run pdf

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In the short-run a change in output is possible only by making changes in the variable inputs like raw materials, labour etc. Inputs like land and buildings, plant and machinery etc. It means that short-run is a period not sufficient enough to expand the quantity of fixed inputs.

Cost Output Relationship in Short Run & Long Run Cost Curves

Cost Output Relationship in Short Run. Time element plays an important role in price determination of a firm. During short period two types of factors are employed. One is fixed factor while others are variable factors of production. Fixed factor of production remains constant while with the increase in production, we can change variable inputs only because time is short in which all the factors cannot be varied.

Raw material, semi-finished material, unskilled labour, energy, etc. Machines, capital, infrastructure, salaries of managers and technical experts are included in fixed inputs.

During short period an individual firm can change variable factors of production according to requirements of production while fixed factors of production cannot be changed. Cost-Output Relationship in the Short Run:. The greater the output, the lesser the fixed cost per unit, i. The reason is that total fixed costs remain the same and do not change with a change in output. The relationship between output and fixed cost is a universal one for all types of business.

Thus, average fixed cost falls continuously as output rises. The reason why total fixed costs remain the same and the average fixed cost falls is that certain factors are indivisible. Indivisibility means that if a smaller output is to be produced, the factor cannot be used in a smaller quantity. It is to be used as a whole. The average variable costs will first fall and then rise as more and more units are produced in a given plant. This is so because as we add more units of variable factors in a fixed plant, the efficiency of the inputs first increases and then decreases.

But once the optimum capacity is reached, any further increase in output will undoubtedly increase average variable cost quite sharply. Greater output can be obtained but at much greater average variable cost. For example, if more and more workers are appointed. It may ultimately lead to overcrowding and bad organization.

Moreover, workers may have to be paid higher wages for overtime work. Average total costs, more commonly known as average costs, will decline first and then rise upward. The significant point to note here is that the turning point in the case of average cost comes a little later in the case of average variable cost. Average cost consists of average fixed cost plus average variable cost. As we have seen, average fixed cost continues to fall with an increase in output while average variable cost first declines and then rises.

So long as average variable cost declines the average total cost will also decline. But after a point, the average variable cost will rise. Here, if the rise in variable cost is less than the drop in fixed cost, the average total cost will still continue to decline. It is only when the rise in average variable cost is more than the drop in average fixed cost that the average total cost will show a rise. Thus, there will be a stage where the average variable cost may have started rising yet the average total cost is still declining because the rise in average variable cost is less than the drop in average fixed cost.

The net effect being a decline in average cost. The least cost-output level is the level where the average total cost is the minimum and not the average variable cost.

In fact, at the least cost-output level, the average variable cost will be more than its minimum average variable cost. The least cost- output level is also the optimum output level. It may not be the maximum output level. A firm may decide to produce more than the least cost-output level. The cost-output relationships can also be shown through the use of graphs. It will be seen that the average fixed cost curve AFC curve falls as output rises from lower levels to higher levels.

The shape of the average fixed cost curve, therefore, is a rectangular hyperbola. Another important point to be noted is that in Fig. This is very simple to explain. Hence, MC curve tends to intersect the AC curve at its lowest point.

Similar is the position about the average variable cost curve. It will not make any difference whether MC is going up or down. Cost Output Relationship in Long Run. The long run is a period long enough to make all costs variable including such costs as are fixed in the short run.

In the short run, variations in output are possible only within the range permitted by the existing fixed plant and equipment. But in the long run, the entrepreneur has before him a number of alternatives which includes the construction of various kinds and sizes of plants. Thus, there are no fixed costs since the firm has sufficient time to fully adapt its plant. And all costs become variable. In view of this, the long-run costs will refer to the costs of producing different levels of output by changes in the size of plant or scale of production.

The long-run cost-output relationship is shown graphically by the long- run cost curve—a curve showing how costs will change when the scale of production is changed. The concept of long-run costs can be further explained with the help of an illustration.

Now it is desired to produce ON. If the firm continues under the old scale, its average cost curve will be NT. If the scale of firm is altered, the new cost curve will be U 3. The average cost of producing ON will then be NA. NA is less than NT. So the new scale is preferable to the old one and should be adopted. In the long run, the average cost of producing ON output is NA. This may be called as the long-run cost of producing ON output.

The moment the scale is installed, the NA cost will be the short-run cost of producing ON output. To draw a long-run cost curve, we have to start with a number of short-run average cost curves SAC curves , each such curve representing a particular scale or size of the plant, including the optimum scale.

One can now draw the long-run cost curve which tangential to the entire family of SAC curves, that is, it touches each SAC curve at one point. Like this: Like Loading Search for Change Language.

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Theory of Costs

Variable costs change according to the quantity of goods produced; fixed costs are independent of the quantity of goods being produced. In economics, the total cost TC is the total economic cost of production. It consists of variable costs and fixed costs. Total cost is the total opportunity cost of each factor of production as part of its fixed or variable costs. Calculating total cost : This graphs shows the relationship between fixed cost and variable cost. The sum of the two equal the total cost.


Those costs which are incurred by a firm in the production of any commodity on the basis of total fixed cost and total variable cost. Total costs are calculated on the.


Cost Output Relation: Long and Short Run | Microeconomics

The chief difference between long- and short-run costs is there are no fixed factors in the long run. There are thus no fixed costs. The LRAC curve assumes that the firm has chosen the optimal factor mix, as described in the previous section, for producing any level of output.

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Cost-Output Relationship

In this article we will discuss about the cost-output relation during long run and short run cost curves. Time element plays an important role in price determination of a firm. During short period two types of factors are employed. One is fixed factor while others are variable factors of production. Fixed factor of production remains constant while with the increase in production, we can change variable inputs only because time is short in which all the factors cannot be varied. Raw material, semi-finished material, unskilled labour, energy, etc.

In the short run the levels of usage of some input are fixed and costs associated with these fixed inputs must be incurred regardless of the level of output produced. Other costs do vary with the level of output produced by the firm during that time period. The sum-total of all such costs-fixed and variable, explicit and implicit- is short-run total cost. It is also possible to speak of semi-fixed or semi-variable cost such as wages and compensation of foremen and electricity bill.

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Cost Output Relationship in Short Run. Time element plays an important role in price determination of a firm. During short period two types of factors are employed. One is fixed factor while others are variable factors of production. Fixed factor of production remains constant while with the increase in production, we can change variable inputs only because time is short in which all the factors cannot be varied. Raw material, semi-finished material, unskilled labour, energy, etc.

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Cost Output Relationship in the Short Run

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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.

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