4.

ELASTICITY OF DEMAND
 What Is Elasticity?

Elasticity is a measure of a variable's sensitivity to

a change in another variable, most commonly this
sensitivity is the change in price relative to changes
in other factors. In business and economics,
elasticity refers to the degree to which individuals,
consumers or producers change their demand or
the amount supplied in response to price or income
changes. It is predominantly used to assess the
change in consumer demand as a result of a
change in a good or service's price.
Coefficient of elasticity of demand
Percantage change in quantity demanded
Percentage change in the relevant variable
 TYPES OF ELASTICITY OF DEMAND
 Price elasticity of demand
 Income elasticity of demand
 Cross elasticity if demand
 Promotional elasticity of demand
DEGREeS OF PRICE ELASTICITY OF DEMAND
 Perfectly inelastic demand (Ep=0)
 Perfectly elastic demand (Ep=∞)
 Unit elasticity of demand (Ep=1)
 Relatively inelastic demand (Ep<1)
 Relatively elastic demand (Ep>1)
 Perfectly inelastic demand (Ep=0)
 Perfectly inelastic demand is when the demand is constant or there is no change
in the demand of a commodity even if the price changes i.e. increases or
decreases.
 Thus, the demand curve is parallel to the Y-axis. Demand for salt is an example
of perfectly inelastic demand.
 Perfectly elastic demand (Ep=∞)
 Perfectly elastic demand is when the price is constant but there is a change in
the demand i.e. increase or decrease of a commodity. Thus, the demand curve is
parallel to the X-axis.
Unit elasticity of demand (Ep=1)
 Unitary elastic demand is when the proportionate change in demand
is equal to the proportionate change in price.
 In other words, it means that the change in demand is the same as the
change in price it may increase or decrease.
 Thus, the demand curve slopes downward from left to right but it is a
rectangular hyperbola. An example of this is comfort goods.
Relatively inelastic demand (Ep<1)
 Relatively inelastic demand is when the proportionate change in demand is less
than the proportionate change in the price. In other words, this means that more
change in price shall cause less change in demand. Thus, the demand curve slopes
downward from left to right but is steeper. An example of this is the necessary
goods.
Relatively elastic demand (Ep>1)
 Relatively elastic demand is when the proportionate change in demand is more
than the proportionate change in the price.
 In other words, this means that a little change in the price shall cause more change
in demand. Thus, the demand curve slopes downward from left to right. An
example of this is luxury goods.
FACTORS AFFECTING PRICE ELASTICITY
OF DEMAND
 Nature of commodity
 Availability of substitute
 Habits & customs
 Alternative uses
 Complementary goods
 Income levels of household
 Time period
 Level of price and extent of change
 Proportion of income spent
 Postponement of consumption
Measurement of price elasticity
 1.POINT ELASTICITY
2. ARC ELASTICITY
The arc method uses the average of the original price
& the new price & the original quantity and new
quantity to determine the elasticity of demand
What Is the Income Elasticity of
Demand?
 Income elasticity of demand refers to the sensitivity of
the quantity demanded for a certain good to a change
in real income of consumers who buy this good, keeping
all other things constant.

 The formula for calculating income elasticity of demand

is the percent change in quantity demanded divided by
the percent change in income. With income elasticity of
demand, you can tell if a particular good represents a
necessity or a luxury.
 Income elasticity of demand
percent change in quantity demanded
percent change in income
Income elasticity & classification of goods
On the value of income elasticity we can classify the goods into broad
category:
 INFERIOR GOODS: these are the goods which consumers buys less as their
income rises . The value of the income elasticity of demand for such goods
is negative. Goods of low quality fall in this category . As income rises
consumers might shift from low quality goods to superior quality goods
 NORMAL GOODS: Most of the goods fall into this category which the
consumers buys more as income rises . That can be further classified into
three categories:
 a)necessities (Ey<1)
 b)comforts (Ey=1)
 c)luxuries(Ey>1)
 NEUTRAL GOODS: In case of these goods , a change in income does not
bring about any change in quantity demanded . These are staples like rice,
wheat, salt, sugar (Ey=0)
 CROSS ELASTICITY OF DEMAND
 Price elasticity of demand for a commodity explains the changes in
quantity demanded due to changes in the price of that commodity .
Demand for a commodity may change not only due to a change in its
own price but due to change in the price of substitute or
complementary goods is termed as cross elasticity of demand.
ADVERTISEMENT OR PROMOTIONAl
ELASTICITY OF DEMAND
 Demand of many goods is also influenced by advertisement or
promotional efforts.

 Itmeans that the demand for a good is responsive to the

advertisement expenditure incurred by a firm.

 The measurement of the degree of responsiveness of demand of a

good to a given change in advertisement expenditure is called
advertisement or promotional elasticity of demand.

 Itmeasures the percentage change in demand to a give ONE

PERCENTAGE change in advertising expenditure. It helps a firm to
know the effectiveness of its advertisement campaign.

 Advertisement elasticity of demand is POSITIVE. Higher the value,

higher is change in demand to change in advertisement expenditure.
Symbolically, it can be explained as;
 RELATIONSHIP BETWEEN PRICE
ELASTICITY OF DEMAND AND
REVENUE CONCEPTS
A.CONCEPT OF REVENUE
The term revenue refers to the receipts obtained by a firm or a seller from the sale
of certain quantity of a commodity.
The concept of revenue can be classified into total, average and marginal revenues.
1. Total revenue: it is the sale proceeds obtained by a firm from the sale of a
certain quantity at a given price. Then total revenue is equal to price per unit
multiplied by quantity sold, that is
TR = P x Q
Where, TR=TOTAL REVENUE
P=PRICE
Q=QUANTITY
2. Average revenue : it is the price or revenue per unit of output .It is obtained by
dividing the total revenue by the number of units sold. Therefore,
Average Revenue= Total Revenue
Output

AR=TR = PxQ = P
Q Q
AR=P
3. MARGINAL REVENUE: is the revenue earned by the firm by selling an
additional unit of its product. In other words , marginal revenue is the
addition made to the total revenue by selling one more unit of the good.
Algebraically , marginal revenue is the addition to the total revenue by
selling one additional unit of output. It is equal to total revenue of n units
minus total revenue of n-1 units, where n is any number. Thus,
MRn=TRn – TRn-1
Where, MR is marginal revenue
MR=dTR
dQ
RELATIONSHIP BETWEEN PRICE
ELASTICITY AND TOTAL REVENUE
Understanding the relationship between price elasticity of
demand and total revenue helps the firms in their pricing
decisions. Total revenue (TR) of the firm is equal to price (p),
times quantity(Q).That is TR = P x Q
 When demand is elastic, price and total revenue move in opposite directions
 When demand is inelastic, price and total revenue move in the same direction
 When demand is unitary elastic , total revenue remains unchanged with the price
changes
RELATION BETWEEN THE ELASTICITY OF DEMAND AND
AVERAGEREVENUE AND MARGINAL REVENUE
Under imperfect competition as the seller increases his sales by lowering the price
of his product, the firm’s average revenue and marginal revenue will fall. The rate
of fall in MR is greater than that in AR. Consequently marginal revenue curve will
lie below AR ,When AR and MR curves falling downward in a straight line, MR
curve lies half way between AR Curve & Y-axis
IMPORTANCE OF ELASTICITY OF
DEMAND
 The concept of elasticity of demand has important
applications in economics and business. The importance of
elasticity of demand is explained below:
 Business decision
 Tax policy
 Foreign trade policy
 Trade unions
 Agriculture
5.DEMAND ESTIMATION
AND FORECASTING
Introduction
 A forecast is an estimation of a situation in the
future. Demand forecast is an estimation of
demand for the product for a future period.
Business enterprises are interested in sales
forecasts to make plans for the future. Since
future is uncertain, no forecasts can be cent
percent correct.However,every firm tries to
obtain a forecast as precise as possible.
Significance of demand forecasting
 Demand forecasts are significant for the following reasons.

 Production Planning: Demand forecasts are essential to plan future

production. Generally, production of goods and services takes time,
that is, it involves a gestation period. Unless future demand is known
well in advance there may not be enough time to plan and execute
production.This can help to eliminate the gap between the demand and
supply of goods preventing shortage and surplus.

 Resource Planning : Production requires the services of various

factors of production like manpower, capital and raw materials.
Arrangements have to be made to procure finance from institutional
and other sources. Similarly, the firm has to make efforts to get skilled
and trained manpower. Sometimes it has to take a measures to train
its labour force. Procurement of raw material needs to be done in
advance.
 Sales Policy : sales constitutes the primary source of
revenue for the business to formulate the realistic sales targets and to
make arrangements for movement a product region wise and
forecasting is very essential. This can help to formulate an effective
sales policy and therefore to increase sales revenue.

 Price Policy: Demand for a caste can help businesses to

formulate appropriate price policy. This can help to avoid wild price
fluctuations.

 Inventory Planning: inventory is our goods and raw materials

held by firms for future production or sale. Firms hold inventories to
meet future demand.
 types of demand forecastS
 There are various types of demand forecast depending upon the
purpose of forecasting.

 Passive and Active forecast: Passive forecast try to predict the

future situation with the existing actions or policies of the firms.
Active forecast try to predict the future situation taking into
account the likely future actions or policies of the firm.

 Forecast for total market and for market segments: Demand

forecast may be made for total market as well as market
segments like domestic markets, foreign markets, regional
markets, etc.

 Forecast for firm demand and industry demand: Demand

forecasts may be made to find out the firm and industry demand.
 Short term and long term demand forecasting: demand
forecasting may be made for short-term or long-term ,that
is, by taking into consideration the time duration with in
which the decisions have to be made. Short term forecast
helps the firm to take decisions within the limited
resources currently available as well as within the existing
capacity. It may be undertaken monthly, quarterly ,half
yearly or yearly to avoid over production or under
production. On the other hand, long term demand for a
caste are undertake in order to find out the viability of
establishing of new company or expanding the existing
business.

 Macro level and Micro level forecasts: macro level

demand forecasting may be made to find out the demand
for certain essential commodities like sugar , edible oil ,
minerals , metals , food grains, for the economy as a
whole. Macro level forecast may also be made concerning
national income, investment ,general price level,etc.
 steps in demand forecasting
 Demand forecasting being a systematic exercise, has to go through the following
steps:
 Nature of forecast: To begin with, one should be clear about the uses of forecast, as
for what purpose it will be used. Depending upon its use one has to choose the type
of forecast micro or macro; short run and long run active or passive ,etc.

 Nature of product: The next step is to understand the nature of product for which we
are undertaking demand for a caste. It is necessary to see whether the product is a
consumer good or a producer good; perishable good or durable good; has
autonomous demand or derived demand; final product or intermediate product,etc.
Consumer goods are used directly for final consumption. On the other hand, a
producer good is used for the production of other goods. Such demand is termed as
derived demand because the demand for it is derived from the final demand for
finished goods.

 Determinants of demand: After identifying the product, we have to find out clearly
the determinants of demand for the product. Demand different determinants will
assume different degrees of importance in demand analysis depending on the nature
of product and nature of forecast stop the important determinants of price of the
product, price of related goods, consumers income and advertisement.
 Identifying relevant data:after finding out the important determinants of
demand it is necessary to identify the relevant data to be used in demand
forecasting. The forecast has to decide whether he is going to use a
primary or secondary sources of data then he has to be collected relevant
data on the various determinants of demand.
 Choice of method: we have to choose a particular method from
among various methods of demand forecasting. A particular method
may be used in demanding upon the nature of the product and type of
forecasting. The choice of the method also depends upon many other
factors like the degree of accuracy required complexity of relationship
in the demand function the available time forecasting exercise,
availability of data from a size of budget for the forecast ,etc.
 Testing accuracy: this is the final step in demand forecasting. There are
various methods for testing statistical accuracy of a forecast. This
testing helps to reduce the margin of error and thereby helps to improve
its validity for the purpose of decision making.

 Evaluating the forecast: finally comedy fore caster will have to evaluate
the forecast and draw conclusions from it.
METHOD OF DEMAND FORECASTING
 SURVEY METHOD
 Expert’s opinion survey
 Delphi method
 CONSUMER SURVEY METHOD
 Complete Enumeration Method
 Sample Survey method
 End use method
 MARKET EXPERIMENTS
 Actual market experiments
 Simulated market experiments
 STATISTICAL METHODS
 Trend method
 Regression method:To obtain forecast through this method the
forecaster will have to follow the following steps:
 Identification of variables
 Collection of historical data
 Choice of demand function
 Estimation of the function
 Derivation of forecast
THANKYOU
6.Theory of production
Concept of production
The theory of production is concerned with the problem
of combination of various inputs to produce certain
level of output. It analyses the physical relationship
between input and output. It provides the base for
analysing the relation between cost and output and
therefore helps the firm to determine its maximizing
output.the essence of production is the creation of
utilities a productive activity may involve many of the
following forms namely;increase in the quantity of
goods and service change in the form of goods and
service or change in the special or temporal distribution
of goods and service
inputs are the resources used in production of goods
and services. The input may be classified into land
labour capital or natural resources and enterpreneur.
Production function
The concept of production function describes the
ways in which the factors of production are
combined by a firm to produce different levels of
output. More specifically, it involves the maximum
volume of physical output available from a given set
of inputs, or the minimum set of inputs necessary to
produce any given level of output
A method or process of production is a combination
of inputs required for the production of output. A
method of production is technically efficient to any
other method if it use is less of all at least one factor
and no more of the other factors as compared with
another method
Isoquants

The term isoquant is derived from two words ISO

means equal and means quant its quantity and
isokont shows all those combinations of factors
which produce the same level of output
An output shows all those combinations of
factors which produce the same level of output.
An isoquant is also known as equal product curve
for ISO product curve
Properties of isoquant
The important properties of isoquants are
Isoquant slopes downward to the right
Isoquants are convex to the origin
Isoquants do not intersect
Isoquants cannot touch either axis
Ridge lines
The area of rational operation on an isoquant lies
between the ridge lines, the firm will produce only in
those segment of isoquants which are convex to the
origin and lie between the ridge lines

The ridge lines are the locus of points of isoquants

where the marginal product of the factors are zero
the upper ridge line implies zero marginal product of
capital and lower marginal ridge line implies zero
marginal product of labour .Production techniques
are only efficient inside the ridge line
Least cost combination of inputs
Least cost combination of inputs is also known as
optimal combination of inputs or producer's
equilibrium.
the analysis of production function has shown that
alternative combinations of factors of production,
which are technically efficient, can be put used to
produce a given level of output.
the firm can maximize its profits either by
maximizing the level of output for a given cost or by
minimising the cost of producing a given output.
there are two ways to determine the least cost
combination of factors of production of a given
output that is ,finding the total cost of factor
combination geometrical method.
Finding the total cost of factor
combination
In this method we try to find the total cost of each
factor combination and choose the one which has
the least cost. The cost of each factor combination
is found by multiplying the price of each factor by its
quantity and then something it for all inputs.
Geometrical method
This is the second and most general way to
determine the least cost combination of factors full
stop it is done with the help of isoquant map and
isoquant line in order to determine the least cost
factor combination for the maximum output for a
given cost we have to superimpose the isoquant
map on the isocost line.
Expansion path( scale line)
The expansion path is defined as the locus of the
point of tangency between the isoquants and the
isocost line. It shows how the firm, given the
factor prices, will change the amount of two
factors when it increases the scale of production.
Since the expansion path represents least cost
combination of factors for different level of output,
it shows the cheapest way of producing each level
of output given the relative factor prices. The
national enterpreneur will choose to produce at
some point on the scale line when both factors
are variable in the long run
THANK YOU 😊
7.Short run and long run
analysis of production
Types of production function
Fixed proportion production function
it is one in which the technology requires a fixed
combination of inputs, se capital and labour, to
produce a given level of output. There is only one way
in which the factors may be combined to produce a
given level of output efficiently in this type of
production there is no possibility of substitution
between the factors of production
fixed proportion production function is illustrated by
isoquant which are 'L' shaped or 'right angle' shaped
this is shown by a figure below
Fixed proportion production function
curve
Variable proportions production
function
It is the most familiar production function. In this
case, a given level of output can be produced by
several alternative combinations of factors of
production say capital and labour. It is assumed that
the factors can be combined in infinite number of
ways.the common level of output obtained from
alternative combinations of capital and labour is
given by an isoquant Q
The isoquant Q is the locus of efficient points of
factor combinations to produce a given level of
output. The second is continuous smooth and
convex to the origin. It ezeon continue substitute
ability of capital and labour over a certain range,
beyond which factors cannot substitute each other.
Variable proportion production
function curve
Short run and long run production
function
There is a need to take into consideration the time factor
in the discussion on production. Thus, in this section we
consider the behaviour of production in the short run and
long run
the short run is a period in which the form can adjust
production by changing variable factors such as
materials and labours but cannot change fixed factors
such as capital.
the factors which can be increased in the short run are
called variable factors for they can be easily changed in
the short period of timethe long run is a period
sufficiently long so that all factors including capital can
be adjusted. There for, in the long run all inputs can be
adjusted according to the requirement. There is no fixed
factor hence all inputs are variable
Law of variable proportions
This was developed by classical economist to explain
the behaviour of agricultural output this law is also
known as the law of diminishing marginal returns.
The lower examine the behaviour of the production in
the short run where the output is increased by
increasing units of variable factors, keeping other
factors fixed. This approach specifies returns to an
individual input
• This law is based on the following assumptions:
• Fixed factors
• Variable factors
• Homogenity of variable factors
• State of technology
Changes in output due to increase in
variable factor
Total product (TP): it is the total amount of output
produced by all the variable inputs applied in combination
with the fixed input. The total product increases at an
increasing rate but up to the 4th unit of labour and
increases at a decreasing rate up to the 8 unit of labour it
reaches maximum at the eighth unit of and remains
constant between 8th and 9th units thereafter the total
product declines

Average product (AP):it is obtained by dividing the total

product by the unit of total variable factor AP=TP/TVF
average product continues to rise to the fifth unit of labour,
remains constant between 5th and 6th units of labour and
then declines.

Marginal product (MP):it is the additional output produced

by an additional unit of variable factor it is equal to the
change in total output divided by a change in total variable
factor employed

MP=TPx-TPx-1
The law of diminishing marginal
returns with the help of diagram
Laws of returns to scale
The laws of returns to scale refers to the long-run analysis of
the laws of production. In the long run output can be
increased by wearing all factors., It in this section we study
the changes in output as a result of changes in all factors. In
other words we study the behaviour of output in response to
changes in the skin. When all factors are increased in the
same proportion and increase in scale occurs.

Scale refers to the quantity of all factors which are employed

in optimal combinations for specified outputs. The term
returns to scale refers to the degree by which output changes
as a result of a given change in the quantity of all inputs used
in production.

We have three types of returns to scale :

Constant returns to scale
Increasing returns to scale and
Decreasing returns to scale
Constant returns to scale
Increasing returns to scale
Decreasing returns to scale
 8.Economies and
diseconomies of scale
Meaning:
Economics and diseconomies of scale are of two types
which is internal and external internal economies and
diseconomies are those which a form reads as a result
of his own expansion. On the other hand, external
economies and diseconomies are those which of form
reads as a result of the growth of industry as a whole.
They are external because they are true to the form
from outside

Internal economies of scale cause the long run average

cost to fall, while internal disk economics of scale
cause the long run average cost to rise as output
increases. On the other hand external economies and
diseconomies of scale affect the position of both the
short run and long run average cost curve. External
economics shift down the cost curve, while external
diseconomies shift up the cost curve
Internal diseconomies of scale
This exist only up to a certain size of the plant. This
size of plant is known as the optimum plant size
because with their size of plant all possible economics
of scale will be fully exploited. If the size of the plant
increases beyond the optimum size there are 10
economics of scale that is decreasing returns to scale
especially from managerial economics. It is argued
that technical dis economist can be avoided by
duplicating the optimum technical size of the plant

Another cause for diseconomies of scale maybe the

exhaustible natural resources for instance, doubling of
the fishing fleet minut lead in a doubling of the catch
of the fish
External economies and diseconomies
of scale
External economies

The external economies are the advantages of form

enjoys as a result of improvement in the industrial
environment in which the form operates. They are
external to the form but internal to the industry to
which the forms belongs. There may be realised
from the actions of other forms in the same industry
or in another industry. Their effect is to cause a
change in the prices of factors employed by the firm.
They cause a shift in the short run and long run cost
curves in the firms
Importance of external economies
Cheapning of materials and equipments
Growth of technical know how
Development of skilled labour
Growth of subsidiary and ancillary industries
Development of transportation and marketing
facilities
Development of information services
External diseconomies of scale
The expansion of an industry is also likely to generate
external diseconomies which raised the cost of
production. An increase in the size of industry is the price
of some factors like raw materials and capital goods
which are in short supply.
Expansion of an industry may also raise the wages of
skilled labour which are in short supply. It may also
create transport bottleneck. As the size of industry
expands lakes rivers and seas may be polluted by forms.
This will create external disk economics to some other
forms are industries
For example, the fishing industries,pollution of this sort
will also create health hazards to the people in the
adjoining areas
Expansion of an industry may also pollute the air from
the smoke of factories or fumes of vehicles this too will
have similar diseconomies
Thank you 😊
9.Cost concepts
Introduction
A profit maximizing firm needs to monitor continuously
about its cost and revenue, it is the level of cost relative
to revenue that determine the overall profitability of the
form. In order to maximize profit a firm has to increase
its revenue and lower its cost. The level of revenue to a
large extent is determined by the market factors and
therefore the firm's ability to influence the revenue is
limited. On the other hand, the cost can be brought
down either by producing the optimum level of output
using the least cost inputs combination or by increasing
productivity of its inputs, or by improving the
organisational efficiency.
Money cost -Implicit
implicit cost are due to the factors which the
entrepreneur himself on and employees in the form.
In other words they are the imported value of the
entrepreneurs owns resources and services. The
wage or salary for the service of the entrepreneur,
interest on the money capital invested by him and
the money rewards for the other factors owned and
used by him in the form of a known as implicit cost
Thus, implicit cost are the opportunity cost of the
factors owned and used by the entrepreneursfull stop
since direct cash payment is not made for them,
these costs are called as implicit cost.Implicit cost is
also known as indirect cost
Explicit
Explicit cost are the contractual cash payments
made by the form for purchasing or hiring the
various factors. In other words, explicit cost refers
to the total expenditure is of the form to hire, rent or
purchase the input it requires introduction. They
include wages and salaries payments for raw
materials, power light fuel advertisements,
transportation and taxes. Explicit money cost is the
accounting cost, because an accountant takes into
account only the payments and charges made by
the form to the suppliers of various productive
factors. Explicit cost is also referred to out of
pocket cost or direct cost.
Accounting cost and Economic cost
Accounting course refers only to the firm's actual
expenditures or explicit cost. Accounting cost are
important for financial reporting by the form and for
tax purposes. However, for managerial decision
making purposes economic cost is the relevant cost
concept
Economic cost includes both explicit and implicit cost
in the cost of production. Therefore, economic cost
equal to explicit cost plus implicit cost.
Accounting cost=Explicit cost
Economic cost=Implicit + Explicit cost
Accounting profit=Total Revenue - Explicit cost
Economic profit = Total Revenue - Total cost
(Implicit+Explicit)
Fixed, variable and total cost
Fixed cost
Total cost of production consists of fixed cost and
variable cost
fixed cost are those which are independent of output
they must be paid even if the form produces no output.
They will not change even if output changes. Their
remains fixed weather output is large or small. Fixed cost
are also called overhead cost for supplementary cost for
example rent, interest, insurance, depreciation charges,
maintenance cost, property taxes, administrative
expense like manager salary and many more
Fixed cost =Overhead cost =Supplementary cost
Variable cost
Variable costs are those which are incurred on the
employment of variable factors of production. They vary
with the level of output. They increase with the rise in output
and decrease with the fallen output. By definition variable
cost remain zero when output is zero. They include
payments for wages, raw materials, fuel power transport.
It is also known as prime cost of production
Variable cost = Prime cost
Total cost
The total cost (TC)of a firm is the function of output(q) it will
increase with increase in output, that is, it varies directly with
the output. In symbol it can be written as
TC =f(q)
The total cost can be divided into two components total
fixed cost(TFC) and total variable cost(TVC)

TC=TFC+TVC
Total , average and marginal cost
Total cost
Total cost is a sum of money spent to produce
goods and services. It is the function of output and
where is directly with output. It can be expressed as
TC=f(q)
Average total cost (ATC) or (AC)
When compared with price or average revenue , will
allow a business to determine whether or not it is
making a profit. Average total cost is the total cost
divided by the number of units produced
ATC=TC/q
ATC=AFC+AVC
Average fixed cost
By dividing total fixed cost by output we get average
fixed cost
ATC=TFC/q
since the same output of fixed cost is shared equally
between the various units of output, AFC falls
continuously as output rises

Average variable cost AVC

Average variable cost is total variable cost divided by
output AVC=TVC/q
the average variable cost will generally fall as the output
rises from zero to the normal capacity level of output
due to the operation of increasing returns.beyond the
normal capacity output, any increase in output will
increase average variable cost quite sharply on account
of the operation of diminishing returns.
Marginal cost (MC)
Marginal cost is the extra additional cost of
producing one extra unit of output. In economics
the term marginal weather apply to utility ,costs of
production ,consumption or what ever, means
'incremental' or 'extra'. Thurs, marginal cost is the
total cost of any units of output minus the total
cost of n -1 units of output
MCn=TCn-TCn-1
10.Cost - output relationship
Cost function
cost function is a derived function. It is derived from
the production function which describes the efficient
method of production at any one time. In other words
the production function specifies the technical
relations between input and the level of output., Thus,
Cost will vary with the changes in the level of output,
nature of production function,factor prices., Thus,
Symbolically we may write the cost function as
C=f(X,T,Pf)
Where,
C- Total cost
X- Output
T- Technology
Pf- Price of factors
Short run cost output
short run is a period where a firm produces its
output within a given capacity. Its cost is divided
between fixed and variable cost. Production is
varied by changing variable cost. In the short run
production is subject to law of variable proportion
which is explained hypothetically with the help of
table.
Relationship between AC,AFC,AVCand MC
Relationship between AC and MC
Short run average cost and output
Long run cost output
The long run is a period of time during which the
firm can alter its size and organisation to change
in demand conditions. In other words, in the long
run the form can adjust its scale of operations or
size of plants to produce any required output in
the most efficient way. In the long run the fixed
factors can be altered. Management can be
reorganized to run a form of a different size.
Capital can also be used differentlyfull stop in
short, all factors are variable in long run and
therefore the scale of operations can be altered. In
long run all cost are variable cost.
LONG-RUN AC AND OUTPUT
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