The document discusses cost behavior and different types of costs in the short run and long run. In the short run, some costs are fixed while others are variable. Total cost is the sum of total fixed cost and total variable cost. As output increases, average and marginal costs typically decrease at first but then increase. In the long run, all costs are variable. Long run total, average, and marginal costs are determined based on optimal input combinations as output changes.

1. COST Output Relationship
It may be noted at the outset that, in cost ac-
counting, we adopt functional classification of
cost. But in economics we adopt a different
type of classification, viz., behavioural
classification-cost behaviour is related to output
changes.
The theory of cost deals with the behaviour of
cost in relation to change in output. In other
words, the cost theory deals with the cost
output relationship.

2. Cost Theory In Short Run
The basic principle of the cost behaviour is that
the total cost increases with the increase in
output.
But the specific form of cost function depends on
whether the time framework chosen for cost
analysis is short – run or long – run.
It is important to know that some costs remains
constant in the short run while all costs are
variable in the long run.

3. Short run
Short run is the period wherein only some of the factors are held
constant and some are variable. Therefore, the costs associated
with both fixed and variable inputs form part of the short period
costs.
Short – Run Total Cost:
TC = TFC + TVC
The costs which are found in the short period:
1) Total Fixed Cost
2) Total Variable Cost
3) Total Cost
4) Average Cost :
a) Average Variable Cost b) Average Fixed Cost c) Average Total Cost
5) Marginal Cost

4. Total Fixed Costs
Fixed cost are costs which do not
change with change in the quantity
of output . For eg .- Salary to
permanent Staff - Licensce fee.

5. Unit Of Output Total Fixed Cost
0 10
1 10
2 10
3 10
4 10
5 10
6 10

6. cost
unit of output

7. Total variable cost
Variable cost is one which varies as
the level of output varies. If output
falls these cost also falls and if
output increases rises these costs
also rise .

8. Unit of output Total variable
cost
Change in
total variable
cost
0 0 0
1 10 10
2 18 8
3 24 6
4 28 4
5 32 4

9. Total Average Cost
Per unit cost of a good is called its average
cost .
AC=TC/Q
Average cost is composed of two types of costs
in the short period :
(i) Average fixed cost (ii) Average variable cost
AC=AFC+AVC

10. Average cost
Average fixed cost
Average fixed cost is
equal to total fixed
cost divided by
output ; i.e.,
AFC=TFC/Q
Average variable cost
Average variable
cost is total variable
cost divided by
output . That is ,
AVC=TVC/Q

11. Output TFC AFC
1 10 10
2 10 5
3 10 3.3
4 10 2.5
5 10 2
6 10 1.7
Output TFC AVC
1 10 10
2 18 9
3 24 8
4 28 7
5 32 6.4
6 38 6.3
7 46 6.6
8 62 7.8

13. Marginal cost
Addition made to the total cost by the production
of one more unit of a commodity is called
marginal cost . Its formula is :
MCn=TCn-TCn-1
OR

14. Output TC MC
0 0 -
1 20 20-0=20
2 28 28-20=8
3 34 34-28=6
4 38 38-34=4
5 42 42-38=4
6 48 48-42=6
7 56 56-48=8

16. Costs in the Long-Run
Each firm operates under short-run production
conditions , but it formulates long-run production
plans . In order to know about the production plans
of a firm , it becomes essential to study longrun
cost .
No cost is fixed in long-run . All costs becomes
variable costs in this period . As in the case of
short-run , there are 3 concepts of costs in the long-
run also ,namely ,
(1)Long-run total cost(LTC) ,
(2)Long-run average cost (LAC) ,
(3)Long-run marginal cost(LMC) .

17. Long Run Total Cost
* The long run total cost curve shows the total
cost of a firm’s optimal choice combinations for
labor and capital as the firm’s total output
increases.
* Note that the total cost curve will always be
zero when Q=0 because in the long run a firm is
free to vary all of its inputs

19. Long Run Average Cost
The Long Run Average Cost, LRAC, curve of
firm shows the minimum or lowest average total
cost at which a firm can produce any given level
of output in the long run (when all inputs are
variable).

21. Long Run Marginal Cost
LRMC is the minimum increase in total cost associated
with an increase of one unit of output when all inputs
are variable. The long-run marginal cost curve is shaped
by returns to scale, along-run concept, rather than the
law of diminishing marginal returns, which is a shortrun
concept.