FUNDAMENTALS of

ECONOMICS (MH106)

By:- Dr. Millo Yasung

Department of Management and Humanities
NITAP
Long Run Cost
◈ Variable Cost
◈ Marginal Cost

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Long Run Average Cost Curve (LAC Curve)
◈ The diagram shows long run cost on
OY-axis and output on OX-axis. 
◈ SAC, SAC1, SAC2, SAC3 and SAC4 are
short run average cost curves which
represent the different size of plants.
◈  LAC has been drawn by combining all
those points of least cost of producing
the corresponding output. 
◈ The least per unit cost of production at
levels of output OQ, OQ1, OQ2, OQ3,
OQ4, and OQ5 respectively.
 II. Long Run Marginal Cost

The long run marginal cost is an addition to the long run

total cost when an additional unit of a commodity is
produced. It is calculated as the short run marginal cost is
calculated. Long run marginal cost curve is also U-shaped
but the fall and rise in the marginal cost curve is not sharp
but it is gradual.
LRAC and LMC curves
◈ The shape of LAC and LMC
are U-shaped.
◈ The relation between LAC and
LMC is the same as is between
short run average cost (SAC)
and short run marginal cost
(SMC) curves.
 Break-Even Analysis
◈ The break-even point refers to the level of output at which total revenue equals total
cost. i.e. Total Revenue = Total Expenses
◈ Total Sales = Total Cost
◈ No Profit = No Loss
◈ Break-even analysis tells you how many units of a product must be sold to cover the
fixed and variable costs of production.
◈ Useful in determining the level of production or a targeted desired sales mix.
◈ Break-even analysis looks at the level of fixed costs relative to the profit earned by
each additional unit produced and sold.
◈ In general, a company with lower fixed costs will have a lower break-even point of
sale.
 Formula for BEP
1) Units of Sale
BEP = Fixed Cost/ Contribution per unit
Contribution = Selling Price per unit – Variable Cost per unit

i.e. BEP = Fixed Cost/ Selling Price per unit – Variable Cost per unit

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2) Terms of Money Value 3) % of estimated capacity

BEP = Fixed Cost BEP = Fixed Cost X 100

Profit/Volume Total Contribution

P/V = Contribution/Sales

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Practice Question
VC = Rs 400 per unit
SP = Rs 600 per unit
TFC = Rs 10,00,000

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Solution
BEP = Fixed Cost
Selling Price per unit – Variable Cost per unit
= 1000000
600-400
= 1000000
200
= 5000 Units
= 5000 X 600 = Rs 30,00,000
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