NAME: MIRZA FAHAD AHMAD

ROLL NO: 22081A1214

BRANCH: I. T. – II YR. – II SEM.
SUB: B. E. F. A. Presentation
College : Shadan College of
Engineering and Technology
Topic : cost Analysis short run and long
run functions
 Cost Analysis : Defn of cost, cost function, Determinants of costs
 Short-run Cost Functions: Total cost (TC), Average Fixed cost (AFC), Average
Variable cost (AVC), Average Total cost (ATC), Marginal Cost (MC)
 Long-Run Cost Functions: Long-Run Average Cost (LAC) Curve, Long-Run
Marginal Cost (LMC), Long-Run Total Cost (LTC)
Cost

Cost refers to a foregoing or sacrifice that has occurred or has possibility to occur in future time period
with an aim to attain a particular objective which can be measured in monetary terms.

COST FUNCTION
Cost function expresses the relationship between cost and its Determinants, like the size of plant, level
of output, prices of inputs, technology, etc. In a mathematical form it can be expressed as,
C = f ( S, O, P, T, ....... )
Where,
C – Cost (unit cost or total cost)
S – Size of plant
O – Level of output
P – Price of inputs used in production
T – Nature of technology
Determinants of costs

Some of the vital cost Determinants are as follows,

1. Size of Plant: Plan size is considered as a key determinant of cost. The cost
of production is usually low of four bigger plants when compared to the
smaller plants and this is mainly due to the economies of large scale
production.
2. Level of Output: Usually, the larger level of output would normally result in
greater production cost. The total cost differs directly with output.
3. Prices of Input Factors: An increase in factor prices would also increase the total
production cost. The different factors of production , such as land, labour, capital and
organization receives rent, wages , interest and salary as their reward. In case their prices
increase then greater payments needs to be made.
4. Technology: Technology is a very significant cost determinant. Any type of development or
enhancement in technology would result in increase in the efficiency or productivity of
factors of production, and this world further result in decrease in the cost of production.
5. Productivity of Factors of Production: The productivity of a factors of production is the
output per unit of that factor when the productivity of a factor of production is higher, then
the cost per unit of the input factor would be low. Therefore, a rise in factor productivity
would decrease the total production cost and decrease in factor productivity would increase
the total production cost.
6. Lot Size: The lot size also influences the production costs. Higher the lot size,
higher will be the cost of production.
7. Level of Capacity Utilization: Especially in case of short-run, the level of
capacity utilisation ascertains the cost. This particularly influences the per unit
fixed cost. With greater capacity utilisation, the fixed cost per unit of output
tends to be low and vice versa.
8. Period Under Considerations: If short period is taken into consideration then
the cost curve would increase drastically where as in case of long period cost
would not increase that much drastically
Short-run cost functions

In short run both fixed and variable costs are present. The different types of
costs in the short run are, Total Cost (TC), Average Fixed cost (AFC), Average
variable cost (AVC), Average Total Cost (ATC), Marginal Cost (MC).
1. Total Cost (TC)
Short-run Total costs are categorized into two-groups,
(a) Total Fixed Cost
(b) Total Variable Cost
(a) Total Fixed Cost (TFC): The private economic cost, which is incurred for fixed inputs of
the firm in short run is known as fixed cost. The TFC curve is a horizontal line as these
cost remain constant in spite of the changes taking place in the output level in the short
run. These costs are also known as supplementary costs, it includes interest on long-term
debt, rent salaries and wages of permanent staff allowance for depreciation.
(b) Total Variable Cost (TVC): The total of all private economic costs of the farm that
changes with the output level in the shorter is known as total variable cost. These costs
are also known as prime costs. It Includes cost of fuel transportation and power payment
meter workers etc.
2. Average Fixed Cost (AFC): The fixed cost, which is incurred on one unit of output in short
run is known as average sixth cost. When total fixed cost is divided by the level of output. It
results in average fixed cost
AVC = TFC/Q
The greater the output, the lower the average fix to cost per unit. The reason is that total fix
to cost remains the same and do not change with a change in output. Thus, the average fixed
cost curve continuously falls as output increases.
3. Average Variable Cost (AVC): The variable cost incurred for producing one unit of output in
the short run is known as short run average variable cost. The average variable cost will first
fall and then rises as more and more units are produced in a in a given plant when short run
total variable cost is divided by the level of output short. And average variable cost is
derived.
AVC = TVC/Q
4. Average Total Cost (ATC): Average total cost initially declines and then rises upwards.
Average total cost consists of average fixed cost plus average variable cost as long as average
variable cost declines, the average total cost will be also decline. But after a point the
average total cost will rise the cost incurred for one unit of output in the short run is known
as shorter. An average total cost shorter. An average total cost is calculated as short and total
cost divided by the level of output alternatively. Can also be calculated by some of the
shorter and average fixed cost and the shorter average variable cost for each level of output
ATC = AFC + AVC = TC/Q
5. Marginal Cost (MC):
Marginal cost is the change in total cost resulting from a unit change in output. The marginal
cost decreases up to certain level of output , but later it rises steeply direct of change either
in short , total cost or short total variable cost with respect to changes in output level in short
term is no short marginal cost.
MC = ΔTVC/ΔQ = ΔTC/ΔQ
Average total cost or average cost is the sum of AFC and AVC. It can be seen that at lower
level of output, the AFC is higher due to which ATC curve tends to be nearer to the AFC curve
in the initial levels of output. As the output goes in, increasing AFC will continue to decrease,
the impact of AFC on ATC also will decline hence. The increasing output starts increasing the
distance between AFC and ATC curves.
 Long-run cost functions

Long run costs are variable in nature as the factors of production. That is size of plant
machinery technology, etc. are variable in nature. The long run cost function is also termed as
the planning cost function. Long run cost curve is a mixture of Various short and curves in the
long run none of the factors of production remains constant.
The various cost curves in the long-run are,
1. Long-Run Average Cost (LAC) Curve:
LAC Curve is also called as envelope curve or as planning of it has multiple SAC’s with respect
to the alternative plants. The LAC function is an envelope of shorten cost functions and the
LAC curve envelope. The SAC curves due to this LC curve is termed as an envelope curve the
pattern of envelope can be seen in the diagram below where LAC curve envelopes SAC1 SAC 2
SAC 3 representing the average cost of production at different levels of output produced by 3
different plants that is A,B and C. Thus, it can envelope as many SAC’s asper the availability
of plant sizes
2. Long-Run Marginal Cost:
Turn on marginal cost LMC join is the point on the short run. Marginal cost curves. SMC’s that
are related with short average cost with respect to each level of output on the LAC curve ,
this can be explained with the help of following
As the figure shows that the LMC curve joins the points ‘x’,’y’ and ‘z’. Optimal level of output
is ‘q’ where the short run as well as long run marginal and average costs are all equal. LMC
should be less than LAC when LAC decreases or LMC can be equal to LAC. When LAC decreases
or LMC can be equal to LAC when LAC attains at minimum of LMC and LMC is greater than LAC
with an increase in LAC.
The LAC curve shown in the figure is an idealised representation of production conditions
during the log run. Because of ‘O’ shape of LAC curve that includes ranges showing both
economies of scale when the curve is downward slope and diseconomies of scale when the
curve is upward sloping.
3. Long-Run Total Cost: From the long-run average cost of producing an output, its quite easy
to construct the long-run total-cost of the output because total cost means the quantity of
output times the average cost.
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