indifference curve
21 : Theory of Cost
1
Recap from last Session
Production cost
Types of Cost: Accounting/Economic Analysis
Cost –Output Relationship
Short run cost Analysis
Prof. Trupti Mishra, School of Management, IIT Bombay
Session Outline
The Long-Run Cost-Output Relations
Break-Even Analysis: Linear Cost and Revenue Functions.
Break-Even Analysis: Non-Linear Cost and Revenue Function
Prof. Trupti Mishra, School of Management, IIT Bombay
long-run is a period for which all inputs change or become variable. long-run cost output relations imply the relationship between the changing scale of a firm and the firm’s total output, whereas in the short-run, this relationship is essentially one between the total output and the variable costs such as, labour and raw materials
Prof. Trupti Mishra, School of Management, IIT Bombay
The long-run cost curve (LTC) is composed of a series of short-run cost curves.
Assumes that the firm has only one plant, with the corresponding short-run cost curve given by STC1,
Suppose the firm decides to add two more plants with associated two more short-run cost curves given by STC2 and STC3.
Prof. Trupti Mishra, School of Management, IIT Bombay
The long-run total cost curve (LTC) is then drawn through the minimum of the short-run cost curves, STC1,STC2, and STC3.
The Long-Run Average Cost Curve (LAC) is derived by combining the short-run average cost curves (SACs)
Prof. Trupti Mishra, School of Management, IIT Bombay
Long Run Total Cost Curve
Prof. Trupti Mishra, School of Management, IIT Bombay
Long Run Average Cost Curve
Prof. Trupti Mishra, School of Management, IIT Bombay
SR and LR Average Costs
The long-run average cost curve shows the minimum average cost at each output level when all inputs are variable, that is, when the firm can have any plant size it wants.
There is a relationship between the LRAC curve and the firm 's set of short-run average cost curves.
1
Recap from last Session
Production cost
Types of Cost: Accounting/Economic Analysis
Cost –Output Relationship
Short run cost Analysis
Prof. Trupti Mishra, School of Management, IIT Bombay
Session Outline
The Long-Run Cost-Output Relations
Break-Even Analysis: Linear Cost and Revenue Functions.
Break-Even Analysis: Non-Linear Cost and Revenue Function
Prof. Trupti Mishra, School of Management, IIT Bombay
long-run is a period for which all inputs change or become variable. long-run cost output relations imply the relationship between the changing scale of a firm and the firm’s total output, whereas in the short-run, this relationship is essentially one between the total output and the variable costs such as, labour and raw materials
Prof. Trupti Mishra, School of Management, IIT Bombay
The long-run cost curve (LTC) is composed of a series of short-run cost curves.
Assumes that the firm has only one plant, with the corresponding short-run cost curve given by STC1,
Suppose the firm decides to add two more plants with associated two more short-run cost curves given by STC2 and STC3.
Prof. Trupti Mishra, School of Management, IIT Bombay
The long-run total cost curve (LTC) is then drawn through the minimum of the short-run cost curves, STC1,STC2, and STC3.
The Long-Run Average Cost Curve (LAC) is derived by combining the short-run average cost curves (SACs)
Prof. Trupti Mishra, School of Management, IIT Bombay
Long Run Total Cost Curve
Prof. Trupti Mishra, School of Management, IIT Bombay
Long Run Average Cost Curve
Prof. Trupti Mishra, School of Management, IIT Bombay
SR and LR Average Costs
The long-run average cost curve shows the minimum average cost at each output level when all inputs are variable, that is, when the firm can have any plant size it wants.
There is a relationship between the LRAC curve and the firm 's set of short-run average cost curves.
References: Managerial Economics; D N Dwivedi, 7th Edition Managerial Economics – Christopher R Thomas, S Charles Maurice and Sumit Sarkar Micro Economics : ICFAI University Press Prof. Trupti Mishra, School of Management, IIT Bombay 50