File Name: cost output relationship in short run and long run .zip
- Cost Output Relationship in Short Run & Long Run Cost Curves
- Theory of Costs
- Cost Output Relation: Long and Short Run | Microeconomics
- Cost in Short Run and Long Run (With Diagram)
Cost Output Relationship in Short Run & Long Run Cost Curves
The cost of production depends on money forces and an understanding of the functional relationship of cost to various forces will help us to take various decisions. Output is an important factor, which influences the cost.
The cost-output relationship plays an important role in determining the optimum level of production. Knowledge of the cost-output relation helps the manager in cost control, profit prediction, pricing, promotion etc. The relation between cost and its determinants is technically described as the cost function. In economics theory, the short-run is defined as that period during which the physical capacity of the firm is fixed and the output can be increased only by using the existing capacity allows to bring changes in output by physical capacity of the firm.
Total cost is the actual money spent to produce a particular quantity of output. But the Total Variable Cost i. Average cost is the total cost per unit.
It can be found out as follows. Marginal Cost is the addition to the total cost due to the production of an additional unit of product. It can be arrived at by dividing the change in total cost by the change in total output. In the short-run there will not be any change in Total Fixed C0st. Hence change in total cost implies change in Total Variable Cost only. The table is prepared on the basis of the law of diminishing marginal returns.
The fixed cost Rs. The table shows that fixed cost is same at all levels of output but the average fixed cost, i. The expenditure on the variable factors TVC is at different rate. If more and more units are produced with a given physical capacity the AVC will fall initially, as per the table declining up to 3 rd unit, and being constant up to 4th unit and then rising.
But the rise in AC is felt only after the start rising. Thus the table shows an increasing returns or diminishing cost in the first stage and diminishing returns or diminishing cost in the second stage and followed by diminishing returns or increasing cost in the third stage.
The short-run cost-output relationship can be shown graphically as follows. But AVC curve i. If the rise in variable cost is less than the decline in fixed cost, ATC will still continue to decline otherwise AC begins to rise. Cost-output Relationship in the Long-Run Long run is a period, during which all inputs are variable including the one, which are fixes in the short-run.
In the long run a firm can change its output according to its demand. Over a long period, the size of the plant can be changed, unwanted buildings can be sold staff can be increased or reduced. The long run enables the firms to expand and scale of their operation by bringing or purchasing larger quantities of all the inputs. Thus in the long run all factors become variable. The long-run cost-output relations therefore imply the relationship between the total cost and the total output.
In the long-run cost-output relationship is influenced by the law of returns to scale. In the long run a firm has a number of alternatives in regards to the scale of operations. For each scale of production or plant size, the firm has an appropriate short-run average cost curves. The short-run average cost SAC curve applies to only one plant whereas the long-run average cost LAC curve takes in to consideration many plants.
It does not mean that the OQ production is not possible with small plant. Rather it implies that cost of production will be more with small plant compared to the medium plant. It is also known as planning curve as it serves as guide to the entrepreneur in his planning to expand the production in future. Knowledge of thecost-output relation helps the manager in cost control, profit prediction, pricing, promotion etc. Proper understanding of the nature and behavior of costs is a must for regulation and control of cost of production.
Cost-output Relationship in Long-Run — This is a period, during which all inputs are variable including the one, which are fixes in the short-run. Long-run cost-output relations therefore imply the relationship between the total cost and the total output. 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. TFC remains the same throughout the period and is not influenced by the level of activity.
The firm will continue to incur these costs even if the firm is temporarily shut down. Even though TFC remains the same fixed cost per unit varies with changes in the level of output. On the other hand TVC increases with increase in the level of activity, and decreases with decrease in the level of activity. If the firm is shut down, there are no variable costs.
Even though TVC is variable, variable cost per unit is constant. The graph below shows Short-run cost output relationship. In the graph X-axis measures output and Y-axis measures cost. TVC curve is upward rising from the origin because TVC is zero when there is no production and increases as production increases. The shape of TVC curve depends upon the productivity of the variable factors.
TC curve is also upward rising not from the origin but from the TFC line. It should be noted that the vertical distance between the TVC curve and TC curve is constant throughout because the distance represents the amount of fixed cost which remains constant. Short-run Average Cost and Marginal Cost The concept of cost becomes more meaningful when they are expressed in terms of per unit cost.
Cost per unit can be computed with reference to fixed cost, variable cost, total cost and marginal cost. Since TFC is constant for any level of activity, fixed cost per unit goes on diminishing as output goes on increasing. The AFC curve is downward sloping towards the right throughout its length, with a steep fall at the beginning.
The AFC curve continues the trend throughout, though at a diminishing rate. AVC curve continues the trend till it reaches a certain level and thereafter it starts rising slowly. Since this rise initially is at a rate lower than the rate of decline in the AFC curve, the ATC curve continues to decline for some more time and reaches the lowest point, which obviously is further than the lowest point of the AVC curve. In other words it is the cost of producing an additional unit of output.
MC is based on the Law of Variable Proportions. A downward trend in MC curve shows decreasing marginal cost i. Similarly an upward trend in MC curve shows increasing marginal cost i.
The following Table illustrates cost output relationship in the short-run, with reference to different concepts of cost. At this output level the ATC will be the least. It is also called the short-run stage of optimum output. At first, a minimalinvestment of resources yields significant results, but the payback from continuingeffort is small. Typically, the increase inretention of information is sharpest after the initial attempts, and then gradually evensout, meaning that less and less new information is retained after each repetition.
For Example the Windows program notepad is extremely simple to learn, but offers very little after it which means as u learn how to work on notepad there arevery less features that you can use or limited functions that can be performed.
On theother hand is a UNIX terminal editor vi, which is difficult to learn, but offers a widearray of features to master after the user has figured out how to work it which impliesthat once you are familiar with the operations of UNIX there are wide range of functions that you can perform but the most difficult task is to learn the basicoperations of UNIX terminal editor. It is possible for something to be easily learned, but difficult to master or hard to learn with little beyond this. The theory assumes that at the early stage of production staff will use moreaverage hour to finish a process and as they gain experience the average time per piece of unit produced or customer service will reduce.
The reduction in the averagetime taken is on a constant rate as production mounts. The constant percentage by which the costs of doubled quantities decreaseis called the rate of learning. The slope of learning curve is minus the rate of learning. Otherwise learning and performance will be compromised. Learning curve can be applied to every aspect of business and life — from software, tolearning about your consumer needs. Thus, they require less time or labor hours to generate same amount of output whichthey were earlier producing by using more labor hours.
It is clear from the diagram that the labor hours required to produce each lot is higher when the firm is producing the first or initial few lots or batches of good. The labor hours required per lot of production to produce the secondlot or later lots on the other hand is lower.
As per the above depicted diagram thelabor hours required to produce the first lot is close to four hours. While the labor hours required for producing the second lot is close to two hours.
The labor hour requirement per lot further goes down by the time company is producing the third andthe fourth lot of the Good or Product.
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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. Variable cost VC changes according to the quantity of a good or service being produced.
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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. For the sake of simplicity we assume that all short run costs to fall into one of two categories, fixed or variable. A typical short-run total cost curve STC is shown in Fig.
Cost Output Relation: Long and Short Run | Microeconomics
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.
Cost in Short Run and Long Run (With Diagram)
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.
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. The costs it shows are therefore the lowest costs possible for each level of output. This critical point is explained in the next paragraph and expanded upon even further in the next section.
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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. Machines, capital, infrastructure, salaries of managers and technical experts are included in fixed inputs.
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