Cost Curves

Topics: Marginal cost, Costs, Economics Pages: 7 (2203 words) Published: September 11, 2013
We already know that following are the important cost concepts related to the production process of a firm: •Fixed Cost
Varibale Cost
Average Cost
Marginal Cost
please refer to following page Introduction to Cost Concepts to understand various cost concepts in detail. Here we will briefly state again the meaning of above stated cost concepts for better understanding of the module on short run cost analysis. Fixed Cost is that cost which does not change (that is either goes up or goes down) irrespective of whether the firm is operating or not. For example on account of strike or account of Lockout in Maruti-Suzuki’s Manesar plant the production process stands still. Even when the plant is not operating the Firm still has to bear such expenses which are indirect in nature. For Example Rent of the factory premises, Wages of administrative employees etc. In other Fixed cost is not related direct production/manufacturing expenses. Variable Cost on the Other hand is directly proportional to the production operations. As the size of production at any business grows, along with that grow the variable expenses. As the name suggests, the variable expenses vary with the business operations. When the firm is not operating on account of Strike/Lockout etc, then the variable cost of the firm is Zero Average Cost is the cost that is obtained after dividing Total Cost with the number of units produced. •Total Cost = Fixed Cost + Variable Cost

Average Cost = Total Cost / Units of Good produced
Marginal Cost is the change in the Total cost when an additional unit of good is produced. In other words Marginal Cost is difference between total Cost of producing ‘N + 1’ units of good and ‘N’ units of good. •Marginal Cost = TCn − TCn − 1

Short Run and Long Run in Economic Theory

Understanding Short Run and Long Run Concept in Economic Theory A famous statement made by celebrated economist J.M. Keynes states that "In the Long Run we are all dead". Thus, while undergoing any learning on microeconomic theory it becomes important for us to know that what is meant by the terms Short Run and the Long Run in economic theory. 'Short Run' is the time period in which if a firm wishes to increase its output it can do so by changing only certain variable inputs or factors of production like Labour, Raw material etc while certain other nputs or factors of production like Capital. Short run is the time period during which if a firm wishes to increase its output then it can do so only by changing the variable factors ( like Labor). Other factors (like capital) remain fixed in the short run or in other words cannot be varied on account of time limitation applicable on the company. For example let us assume that a company like Maruti-Suzuki in India suddenly experiences spurt or upward movement in the demand of certain category of cars in its product line. The company will therefore try to produce more cars in order to cater to the increased market demand. In the short run the company will be able to increase the amount of production only by varying inputs like labor, raw material etc but the company will not be able to alter the plant size in order to enhance its production facility as such change in production facility may require some time in terms of implementation of such change. On the other hand in the 'Long Run' everything is variable. Thus if a company wishes to enhance its output it can do so by varying all the factors like labor, raw material, plant size, important machinery and other facilities. In other words in the long run all factors of production or inputs are variable for the company. As per the above example of Maruti-Suzuki in the long run the company will also be in position to increase its plant size or will be in position to start new production facility in order to produce more. Types of Short Run Cost Functions

Short run cost function of a Company can be of any of the following types: •Linear...
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