NTA UGC NET - Commerce: UNIT 03: BUSINESS ECONOMICS (PART 03)

 

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UNIT 03

BUSINESS ECONOMICS

PART 03

 

Cost Output Relationship in the Short Run and long run 

 

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MCQ:  Which of the following statements are correct?
 

a) In short run a change in output is possible only by making changes in the variable inputs All the cost are variable in Long run
 

b) In short run least cost input combination lies at the output level where MC = AC
 

c) In long run least cost input combination lies at the point where LMC = LAC
 

 

Cost Output Relationships

• The relationship between cost and output is called cost function

• Cost Function is expressed as:

 

        TC = f (Q)
        Where TC – Total Cost
        f – Function of
        Q – Total output

• A firm has two types of cost functions

        _ Short Run Cost Function

       _  Long Run Cost Function 

 

Cost Output Relationship in the Short Run

• In short run a change in output is possible only by making changes in the variable inputs.

• TC Consist of TFC & TVC

• TFC remain fixed irrespective of the quantity of output

• TVC increase with increase in output and decrease with decrease in output

• So, Increase in TC implies an increase in TVC only

        TC = TFC + TVC

        TVC = TC – TFC

        TFC = TC – TVC

        TC = TFC When the output is zero 

 

        TFC, TVC, and TC
        (Graph 1) 

 

• TFC curve is a straight line parallel to X axis because TFC does not change with increase in output

• TVC curve is an upward rising from the origin because TVC is zero when there is no production

• TC is also an upward rising curve but from the TFC line

• This is because even if there is no production the TC is equal to TFC

 

Average cost and Marginal cost

• Average Cost = Total cost / Unit of Output 

 

• Marginal Cost = Change in Total Cost / Change in Quantity (cost of producing an additional unit of output) 

 

• When AC is falling MC is less than AC

 

• When AC is rising MC is more than AC

• In short run least cost output combination lies at the output level where MC = AC 

 

Cost output Relationship in the Long run

• Long run is a period long enough to vary all inputs

• The Cost output Relationship in the Long run is subject to law of returns to scale

• In long run a firm has a series of SAC

• In long run least cost input combination lies at the point where LMC = LAC 

 

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