Cost-­‐output	  Rela-onship	  10/24/11	                 Prof.Prasad	  Joshi	  
Cost	  func-on	  •  The	  cost-­‐output	  rela-onship	  plays	  an	     important	  role	  in	  determining	  the	  op-mum...
•  The	  cost	  func-on	  can	  be	  classified	  as	  :	    	  (a)short-­‐run	  cost	  func-on	  and	  	    	  (b)	  long	...
•  Short-­‐run	  is	  defined	  as	  that	  period	  during	     which	  the	  physical	  capacity	  of	  the	  firm	  is	  ...
Short	  run	  costs	  10/24/11	            Prof.Prasad	  Joshi	  
10/24/11	     Prof.Prasad	  Joshi	  
Short	  run	  cost	  curves	  10/24/11	                 Prof.Prasad	  Joshi	  
Long	  run	  cost	  curve	  10/24/11	                Prof.Prasad	  Joshi	  
Long	  run	  marginal	  cost	  curve	  10/24/11	                       Prof.Prasad	  Joshi	  
Economies	  Of	  Scale	  10/24/11	               Prof.Prasad	  Joshi	  
§  When	  a	  firm	  expands	  its	  size	  &	  goes	  for	  large	      scale	  produc-on,	  it	  stands	  to	  enjoy	  c...
§  Internal	  economies	  Of	  scale:	  IE	  are	  those	      advantages	  of	  large-­‐scale	  produc-on	  which	      ...
§  External	  economies	  Of	  scale:	  when	  a	  par-cular	      industry	  grows	  in	  size	  &	  strength,	  it	  br...
Diseconomies	  Of	  Scale	  10/24/11	                 Prof.Prasad	  Joshi	  
Diseconomies	  refer	  to	  the	  disadvantages	  	  suffered	  by	  a	  firm	  when	  it	  expands	  its	  	  produc-on	  b...
§  Beyond	  the	  stage	  of	  op-mum	  produc-on,	  the	      efficiency	  of	  machinery	  &	  equipment	  declines.	    ...
  	  	   	   	   	  Thank	  you!	  10/24/11	     Prof.Prasad	  Joshi	  
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Cost output relationship


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Cost output relationship

  1. 1. Cost-­‐output  Rela-onship  10/24/11   Prof.Prasad  Joshi  
  2. 2. Cost  func-on  •  The  cost-­‐output  rela-onship  plays  an   important  role  in  determining  the  op-mum   level  of  produc-on.   TC  =  F(Q)   Where,   TC  =  Total  cost   Q  =  Quan-ty  produced   F  =  func-on  10/24/11   Prof.Prasad  Joshi  
  3. 3. •  The  cost  func-on  can  be  classified  as  :    (a)short-­‐run  cost  func-on  and      (b)  long  run-­‐cost  func-on.  10/24/11   Prof.Prasad  Joshi  
  4. 4. •  Short-­‐run  is  defined  as  that  period  during   which  the  physical  capacity  of  the  firm  is  fixed,   and  during  which  output  can  be  increased   only  by  using  the  exis-ng  capacity  more   intensively.  •  Long-­‐run  is  a  period  during  which  it  is  possible   to  increase  the  firms  capacity  or  to  reduce  it   in  size.  10/24/11   Prof.Prasad  Joshi  
  5. 5. Short  run  costs  10/24/11   Prof.Prasad  Joshi  
  6. 6. 10/24/11   Prof.Prasad  Joshi  
  7. 7. Short  run  cost  curves  10/24/11   Prof.Prasad  Joshi  
  8. 8. Long  run  cost  curve  10/24/11   Prof.Prasad  Joshi  
  9. 9. Long  run  marginal  cost  curve  10/24/11   Prof.Prasad  Joshi  
  10. 10. Economies  Of  Scale  10/24/11   Prof.Prasad  Joshi  
  11. 11. §  When  a  firm  expands  its  size  &  goes  for  large   scale  produc-on,  it  stands  to  enjoy  certain   benefits.  Such  advantages  which  arise  due  to   large  scale  produc-on  are  known  as  economies   of  scale.  §  According  to  Marshal,  there  are  2  types  of   economies  of  scale.  They  are   §  Internal  Economies  of  Scale   §  External  Economies  Of  Scale  10/24/11   Prof.Prasad  Joshi  
  12. 12. §  Internal  economies  Of  scale:  IE  are  those   advantages  of  large-­‐scale  produc-on  which   accrue  to  a  firm  on  account  of  its  superior   techniques  &  management.  Following  are  some   of  the  IE  of  scale.  §  Technical  Economies  §  Managerial  Economies  §  Marke;ng  Economies  §  Financial  Economies  §  Risk  bearing  Economies  of  scale  10/24/11   Prof.Prasad  Joshi  
  13. 13. §  External  economies  Of  scale:  when  a  par-cular   industry  grows  in  size  &  strength,  it  brings  many   advantages  to  all  the  firms  within  that  industry.   Those  advantages  which  are  available  to  all  the   firms  are  called  the  EE  of  scale.  Following  are   some  of  the  EE  of  scale.  §  Economies  of  Localisa;on  §  Economies  of  Informa;on  §  Economies  of  Specialisa;on     10/24/11   Prof.Prasad  Joshi  
  14. 14. Diseconomies  Of  Scale  10/24/11   Prof.Prasad  Joshi  
  15. 15. Diseconomies  refer  to  the  disadvantages    suffered  by  a  firm  when  it  expands  its    produc-on  beyond  the  stage  of  op-mum    combina-on  of  factors  or  beyond  the  level  of    op-mum  output.  Following  are  such    diseconomies  of  scale:  §  When  the  firm  expands  produc-on  beyond   certain  level.  It  develops  many  complexi-es.   Effec-ve  management  &  smooth  co-­‐ordina-on   at  different  levels  become  difficult.       10/24/11   Prof.Prasad  Joshi  
  16. 16. §  Beyond  the  stage  of  op-mum  produc-on,  the   efficiency  of  machinery  &  equipment  declines.   This  is  called  the  technical  diseconomy  §  Beyond  certain  point,  the  firm  is  compelled  to   pay  higher  wages  to  recruit  labour.   Consump-on  of  raw  material  becomes  costlier.   It  faces  the  problem  of  shortage  of  fuel,  power,   finance  etc.  10/24/11   Prof.Prasad  Joshi  
  17. 17.            Thank  you!  10/24/11   Prof.Prasad  Joshi