1 / 17

# Cost-output Relationship - PowerPoint PPT Presentation

Cost-output Relationship. 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.

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about 'Cost-output Relationship' - ferris

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

### Cost-output Relationship

www.mbaknol.com

• 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

• www.mbaknol.com

www.mbaknol.com

• Average Fixed Cost

• Average Variable Cost

• Average Total cost

www.mbaknol.com

• Total, average & marginal cost

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

• Fixed cost & variable cost

1.Total fixed cost (TFC) = cost of using fixed factors = cost that does not change when output is changed, e.g.

2. Total variable cost (TVC) = cost of using variable factors = cost that changes when output is changed,

www.mbaknol.com

• 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.

www.mbaknol.com

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.

www.mbaknol.com

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.

www.mbaknol.com

www.mbaknol.com

www.mbaknol.com also decline. But after a point the Avg. variable cost will rise.

Cost-output Relationship In The Long-Run also decline. But after a point the Avg. variable cost will rise.

www.mbaknol.com

• 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

www.mbaknol.com

1. Total cost (TC) factor & he will be able to meet the demand by adjusting supply. Change in Fixed factors like building, machinery, managerial staff etc.. = 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

www.mbaknol.com

• 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

www.mbaknol.com

• 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.

www.mbaknol.com

www.mbaknol.com mergers.

Thank You mergers.

www.mbaknol.com