Simple Thoughts: COST OUTPUT RELATIONSHIP IN THE SHORT RUN
In the long-run there are no fixed inputs, and therefore no fixed costs. The long- run average cost curve shows the minimum average cost at each output level relationship between the LRAC curve and the firm's set of short-run average cost . 572233.info 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. The graph below shows Short-run cost output relationship. In the graph . Only short run is explained I need both short and long. ReplyDelete.
These two concepts will be discussed in the context of market structure and pricing. Column 5 shows that average fixed cost decreases over the entire range of output.
Cost in Short Run and Long Run (With Diagram)
Instead, the long run simply refers to a period of time during which all inputs can be varied. In order to be able to make this decision the manager must have knowledge about the cost of producing each relevant level of output. We shall now discover how to determine these long-run costs. For the sake of analytical simplicity, we may assume that the firm uses only two variable factors, labour and capital, that cost Rs.
Cost Output Relation: Long and Short Run | Microeconomics
The characteristics of a derived expansion path are shown in Columns 1, 2 and 3 of Table In column 1 we see seven output levels and in Columns 2 and 3 we see the optimal combinations of labour and capital respectively for each level of output, at the existing factor prices. These combinations enable us to locate seven points on the expansion path. Column 4 shows the total cost of producing each level of output at the lowest possible cost. For example, for producing units of output, the least cost combination of inputs is 20 units of labour and 10 of capital.
At existing factor prices, the total cost is Rs. Here, Column 4 is a least-cost schedule for various levels of production. In Column 5we show average cost which is obtained by dividing total cost figures of Column 4 by the corresponding output figures of Column 1. Thus, when output isaverage cost is Rs.
All other figures of Column 5 are derived in a similar way. From column 5 we derive an important characteristic of long-run average cost: In Column 6 we show long-run marginal cost figures. Each such figure is arrived at by dividing change in total cost by change in output. For example, when output increases from Rs.
Therefore, marginal cost per unit is Rs. We may now show the relationship between the expansion path and long-run cost graphically. Finally, the known production function gives us the isoquant map, represented by Q1, Q2 and so forth. We may now relate this expansion path to a long-run total cost LRTC curve. For example, in Fig. Every other point on LRTC is derived in a similar way. Thus, totally different production processes may be used to produce say Q 1 and Q2 units of output at the lowest attainable cost.
On the basis of this diagram we may suggest a definition of the long run total cost. First, costs and output are directly related; that is, the LRTC curve has a positive slope. But, since there is no fixed cost in the long run, the long run total cost curve starts from the origin. Since the slope of the total cost curve measures marginal cost, the implication is that long-run marginal cost first decreases and then increases. It may be added that all implicit costs of production are included in the LRTC curve.
Long-Run Average and Marginal Costs: We turn now to distinguish between long run average and marginal costs. Long-run average cost is arrived at by dividing the total cost of producing a particular output by the number of units produced: They have essentially the same shape and relation to each other as in the short run.
The marginal cost intersects the average cost curve at its lowest point L in Fig. The reason is also the same. The reason has been aptly summarized by Maurice and Smithson thus: The Shape of the LAC: Economies and Diseconomies of Scale: The shape of the long-run average cost depends on certain advantages and disadvantages associated with large scale production. These are known as economies and diseconomies of scale. Various factors may give rise to economies of scale, that is, to decreasing long-run average costs of production.
Greater Specialization of Resources: It is because a large-scale firm can often divide the tasks and work to be done more readily than a small-scale firm. More Efficient Utilization of Equipment: The production of automobiles, steel and refined petroleum are obvious examples. A small-scale firm cannot ordinarily do these things. Reduced Unit Costs of Inputs: A large-scale firm can often buy its inputs-such as its raw materials-at a cheaper price per unit and thus gets discounts on bulk purchases.
For instance, the construction cost per square foot for a large factory is usually less than that for a small one. Again, the price per horsepower of various electric motors varies inversely with the amount of horsepower. In certain industries, larger-scale firms can make effective use of many by-products that would go waste in a small firm.
A typical example is the sugar industry, where by-products like molasses and bagasse are made use of. Growth of Auxiliary Facilities: As a result, the long-run average cost curve starts to rise. Decision-Making Role of Management: With increase in the size of organisation there occurs delay in decision-making. The cost-output relation during short period can be studied with the help of short run cost curves based on short run costs as given below: Short Run Total Costs: Short run total costs of a firm are of following types: 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 basis of the following formula: Short run total costs can be seen from the following table: The table reveals that total fixed cost remain constant when the production is zero or its is increasing while total variable cost is zero when production is zero and it changes with the change in output and total cost is the aggregate of total fixed cost and total variable cost. Those costs which remain constant when the output is zero as well as it is increasing are called total fixed costs.
Such costs are borne by the firm whether there is production or not. These costs are not concerned with the production of a commodity. These costs are borne even there is zero production during short period. The Table 1 shows when production is zero the total fixed cost is Rs. Hence, total fixed costs remain constant.
These costs are also known as supplementary costs, general costs, indirect costs and overhead costs. Those costs which vary with the production of a commodity during short period and they have direct relation with the change in production. When production is zero these costs will be zero and when production increases they will move in the same direction.
These costs are incurred on raw material, direct wages and expenses on energy or power. Variable costs are also called prune costs or direct costs. Total variable costs show an increasing trend as shown in Diagram 1. Thus, total costs are the summation aggregates of total fixed costs and total variable costs.
All these costs are related to short run production.
Cost Output Relation: Long and Short Run | Microeconomics
They are shown in the Diagram 2 on the basis of the Table 2. TFC is parallel to OX-axis and it remains constant whether production is zero or it is 10 units. TVC starts from zero production where it is zero and goes on increasing with the increase in output.
When production is zero total cost is equal to TFC and it increases with increase in production. Average Costs or Per Unit Costs: During short period average costs or per unit costs can be divided into following categories: The average fixed cost is the total fixed cost divided by the volume of output.
There is an inverse relation between output and average fixed cost. With the increase in output average fixed cost decreases and with the decrease in output the average fixed cost will increase. The shape of average fixed cost curve becomes rectangular hyperbola with the increase in output. It is calculated from the following formula: The average variable cost is total variable cost divided by the volume of output.
Average variable cost falls with the increase in output, reaches at its minimum and then starts rising. By the operation of law of increasing returns the AVC decreases, and by the operation of constant returns leads to constancy in AVC and the law of diminishing returns leads to increase in AVC.
The shape of AVC is U-shaped because of the operation of the laws of returns during short period. The AVC is calculated by the formula given below: The following is the formula of calculating AC: Another formula for the calculation of AC is as given under: Its shape is U-shaped because of the operation of the laws of return during short period.
It is an addition to total cost by producing an additional unit of output. It can be calculated as the change in total cost divided by an additional unit change in the output. The formula for its calculation is as given below: For example, if the total cost TC of 5 units of a commodity is Rs.