Short run and long cost output relationship

Cost-Output Relationship

short run and long cost output relationship

Cost-Output Relationship. A proper understanding of the nature and behavior of costs is a must for regulation and control of cost of production. The cost of. 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 . Cost- output relationship has two aspects 1. Cost –output relationship in short run 2. Cost –output relationship in long run The short run is a.

The short-run cost-output relationship can be shown graphically as follows. But AVC curve i.

Simple Thoughts: COST OUTPUT RELATIONSHIP IN THE SHORT RUN

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. 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.

short run and long cost output relationship

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.

Cost in Short Run and Long Run (With Diagram)

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.

Study of Cost-Output Relationship: Short Run and Long Run Aspects | Managerial Economics

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.

Cost-Output Relationship | spoorthi patil - animesost.info

The following diagram reveals the relationship that exists among these concepts: Average fixed cost is obtained by dividing the TFC by the number of units produced. 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.

short run and long cost output relationship

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. Marginal Cost is the increase in TC as a result of an increase in output by one unit.

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.

Short Run Cost-Output Relation - Short Run Cost Curves - Cost Function

Cost-Output Relationship in the Short Run: Average Fixed Cost Output: 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.

short run and long cost output relationship

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.

short run and long cost output relationship

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. Average Variable Cost and Output: 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.