Cost output relationship

this is the slide about cost output relationship in economics subject of 1 sem MBA

1. PRESENTATION TOPIC: COST- OUTPUT RELATIONSHIP Presenting by IBRAHIM NOUMAN M H SREEBA .V ANUSREE

2. Cost- output relationship has two aspects Cost –output relationship in short run Cost –output relationship in long run The short run is a period which does not permit alterations in the fixed equipment and in the size of the organization. The long run is a period in which there is sufficient time to alter the equipment and the size of the organization . output can be increased without any limits being placed by the fixed factors of production.

3. COST –OUTPUT RELATIONSHIP IN SHORT RUN

4. Short run may be studied in terms of Average fixed cost Average variable cost Average total cost Average fixed cost The greater the output ,the lower the fixed cost per unit i.e. the average fixed cost . Total fixed cost remain the same and do not change with a change in output.

5. Average variable cost The average variable cost will first fall and then rise as more and more units are produced in a given place. E.g. electricity charge , labour cost.etc.

6. AVERAGE TOTAL COST Average total cost , also known as average cost , would decline first and 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 average variable cost first declines and then rises. When the rise in AVC is more than the drop in average fixed cost that the average total cost will show a rise.

7. COST - OUTPUT RELATION IN LONG RUN

8. Long run period enables the producers to change all the factor and will be able to meet the demand by adjusting supply . change in fixed factors like building , machinery , managerial staff etc. All factors became variable in the long run In the long run we have 3 costs i.e. total cost. , Average cost and Marginal cost. Total cost TC =TFC +TVC Average cost AC=TC/output Marginal cost MC =change in TC as a result of change in output by one unit

9. When all the short run situations are combined , it forms the long run industry. During the short run . Demand is less and the plant’s capacity is limited .when demand rises ,the capacity of the plant is expanded . When short run average cost curves of all such situations are depicted , we can derive a long run cost curve out of that. We can make a long run cost curve by joining the tangency points of all short run curves.

10. 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 and low profitability

11. THANK YOU