23589080 short run long run cost curves copy

8/3/2019 23589080 Short Run Long Run Cost Curves Copy

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PRESENTED BY :-

SAJU THOMAS

SARANSH ANANDROHAN SINGH

DIT SCHOOL OF BUSINESS

PRESENTATION ON

SHORT RUN & LONG RUN COST CURVES



Cost:-Sum of the inputs may multiplied by their respective

prices and added together give the money value of the

inputs, that is the cost of production.



TYPES OF COST

y Opportunity and actual cost

y Explicit and implicit cost

y Out of pocket and book costy Fixed, variable and marginal cost

y Short term and long term cost

y Incremental and sunk cost

y Historical cost and replacement cost

y Private and social cost



Opportunity cost and actual cost

y Opportunity cost ²It may be defined as the expected returns

form the second best use of the resources which are forgone

due to the scarcity of resources.

y

Actual cost ²The total money expenses recording in the books of accounts.



Business cost and Full cost

Business cost ²Business cost include all the expenses which are

incurred to carry out a business.

Full cost ²It includes business cost ,opportunity and normal

profit.



Explicit cost and Implicit cost

y Explicit cost ²Explicit cost are those cost which fall under

actual or business costs entered in the books of accounts.

y Implicit cost ²Implicit cost do not take the form of cash

outlays



Out of pocket cost and Book cost

y Out of pocket cost ²The items of expenditure which involve

cash payments or cash transfer are known as out of pocket

costs.

y

Book cost ²Book cost which are entered in the books of accounts



Fixed cost and variable cost

y Fixed cost ²Fixed cost are those which are fixed in volume

for a certain given output/scale of production.

y Variable cost ²Variable cost are those which vary according

to the level of production.



y Marginal cost ²It is the addition to total cost due to the addition of oneunit of output.

y Short run cost ²short run cost are those cost which vary according tothe variation in output

y Incremental cost -It arises due to change in scale of production,introduction of a new product and replacement of a worn out plant andmachinery.

y Sunk cost ² sunk cost are those cost which can not be changed.

y Historical cost ²It includes all the past expenditure incurred for theproduction of goods and services.

y Replacement cost ²It refers to the outlay which has to be made forreplacing an old asset.



y Private cost ²private cost are those which are incurred by anindividual/firm on the purchase of goods and services fromthe market.

y Private cost =explicit cost +implicit cost

y Social cost ² it is the total cost borne by the society due toproduction of a commodity.



Short run cost function:-

y The short run is defined as a period of time in which output of afirm can be increased or decreased by changing the amt of

variable factors such as labour , raw materials , chemicals , fuel

etc

y Total fixed & variable cost in the short run:-y Total Fixed cost :-

y Fixed cost are those which are independent of output , ie they do not

change with changes in output. Even if the firm closes down for some

time in the short run but remains in business these costs have to be borne by it.

y EXAMPLE:- charges such as contractual rent , insurance fee ,

maintenance cost , property tax, interest on the borrowed funds etc.



Total Variable cost:-y Variable costs are those costs which are incurred on the employment

of variable factors of production whose amt. can be altered in the

short run. Thus, the total variable cost change with changes in output

in short run, i.e. they increase or decrease when the output rises or

falls.y EXAMPLE: it includes payment to labour employed , the prices of

the raw material , fuel & power used etc.

TC = TFC+TVC



Table :-



The short run average & marginal cost

curves:-

y Average fixed cost:-

y Average fixed cost is the total fixed cost divided by the no. of

units of output produced . Therefore,

AFC=TFC / Qy Avg. fixed cost curve slops downward throughout its length but it

doesn't touch the x axis .

y As output increases , the total fixed cost spreads over more &

more units & therefore avg. fixed cost becomes less & less.



Average variable cost:-y Average variable cost is the total variable cost divided by the no.

of units of output produced. Therefore,

AVC= TVC / Q

The average variable cost is variable cost per unit of output .

y Average total cost:-y The average total cost or what is called simply average cost is the total

cost divided by the number of unit of output produced.

y Thus, Average total cost = total cost/ output



The marginal cost curve (MC)y A marginal cost that graphically represents the relation between

marginal cost incurred by a firm in the short-run product of a good orservice and the quantity of output produced.This curve isconstructed to capture the relation between marginal costand the level of output, holding other variables, like technologyand resource prices, constant. The marginal cost curve is U-shaped.Marginal cost is relatively high at small quantities of output,then as production increases, declines, reaches a minimumvalue, then rises. The marginal cost is shown in relation to marginalrevenue, the incremental amount of sales that an additional product orservice will bring to the firm. This shape of the marginal cost curve is

directly attributable to increasing, then decreasing marginal returns(and the law of diminishing marginal returns - Diminishing returns).Marginal cost equal w/MPL. For most production processes themarginal product of labor initially rises, reaches a maximum value andthen continuously falls as production increases. Thus marginal cost

initially falls, reaches a minimum value and then increases.



Theory of long run cost:-

yThe long run refers to a time period during which fulladjustment to a change in environment can be made by the firm

by varying all inputs , including capital equipment & factory

building.

yLong run avg. cost curve :-

The long run as noted above is period of time during which the

firm can vary all its inputs. The long run production function has

therefore no fixed factors & the firm has no fixed cost in the long

run.In the short run, some inputs are fixed & others are varied to

increase the level of output .while in the long run none of the

factors is fixed and all can be varied to expand output.



The LR Relationship Between

Production and Cost

y In the long run, all inputs are variable.

y What makes up LRAC?



The Long-Run Cost Function :-

y Reasons for Economies of Scale«

y Use of technically efficient machine

yDivision of labour

y Invisibility & economies of scale

y Financial economy

y Economies of scope.



The Long-Run Cost Function :-

y Reasons for Diseconomies of Scale«

Decreasing returns to scale

Input market imperfectionsManagement coordination and control

problems



THANK YOU

23589080 short run long run cost curves copy

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