Simple Thoughts: COST OUTPUT RELATIONSHIP IN THE SHORT RUN
(A SIMILAR RELATIONSHIP EXIST FOR THE LONG RUN, BUT. CONVENTION IS SHORT RUN COST CURVES: IN THE FOLLOWING ORDER. FC, VC, TC. In this article we will discuss about Cost in Short Run and Long Run. This curve indicates the firm's total cost of production for each level of output when the . Thus, it is clear that MC refers to MVC and has no relation to fixed cost. .. Share Your Knowledge Share Your Word File Share Your PDF File Share Your PPT File . The cost-output relationship plays an important role in determining the optimum level of production. Cost-Output Relationship in the Short-Run . The long-run cost-output relations therefore imply the relationship between the total cost and the Download Presentation: Cost-Output Relationship(pptx).
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.
It can be calculated on the basis of the above formula as given under: In the beginning the MC falls, reaches at its minimum and thereafter continuously rises. MC is also U- shaped.
The cost-output relation during short period can be seen from Table 2. AFC is decreasing, but it is positive. AVC decreases, remains constant and thereafter increases. AC also decreases, remains constant and shows an increasing trend. MC increases, remains constant and thereafter shows an increasing trend. On the basis of the Table 2 we can show the costs and output relation during short period in the following diagram: The U-shaped curves are on account of the operation of the laws of return during short period.
AFC curve shows a decreasing trend. There is a close relationship between AC and MC as given below: The MC curve cuts the AC curve at its minimum point.
The relation between AC and MC can be seen from the following diagram during short period: Long period gives sufficient time to business managers to change even the scale of production. All the factors of production are variable.
All the costs are variable costs and there is no fixed cost. The supply of goods can be adjusted to their demands because scale of production and factors of production can be changed.
Cost in Short Run and Long Run (With Diagram)
In the long run we can study the long run average cost curve and long run marginal cost curve. In the long run, all the factors of production are variable and the firm has a variety of choices to select the size of the plants and the factors of production to be employed. Various short run average cost curves represent the various sizes of the plants available to a firm. We can get the long run average cost curve with the help of all the short run average cost curves.
The long run average cost curve envelopes all the short run average cost curves in it. The long run average cost curve is also a flat U-shaped curve as shown in the following diagram: The diagram shows long run cost on OY-axis and output on OX-axis. LAC has been drawn by combining all those points of least cost of producing the corresponding output.
The long run marginal cost is an addition to the long run total cost when an additional unit of a commodity is produced. It is calculated as the short run marginal cost is calculated.
Long run marginal cost curve is also U-shaped but the fall and rise in the marginal cost curve is not sharp but it is gradual.
In the short run SAC curve is U-shaped because the laws of return operate but in the long run LAC is also U-shaped because the laws of return of scale operate, namely, law of increasing returns to scale, law of constant returns to scale and the law of diminishing returns to scale.
As the level of output is expanded or scale of operation is increased by the large firm they will enjoy economies of scale but if these firms produce beyond their installed capacity then they might get diseconomies of scale. Economies of scale bring down the fall in unit cost and diseconomies results into rise in it. Economies of scale are the results of the operation of laws of return to scale in long run.
They are of two types: Internal economies of scale are those economies which are on account of the size and operations of an individual firm itself and not from the outside factors. These economies may be of following categories: 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.