The document defines short-run and long-run costs, and explains the relationships between total, fixed, and variable costs. It also defines average and marginal costs. Specifically, it states that in the short-run, output can be increased or decreased while fixed costs remain unchanged. Total cost equals fixed plus variable cost. Average and marginal cost curves are also discussed, with average cost initially declining and then increasing due to diminishing returns.

2. 
Cost function may be defined as
the relationship between costs of a
product and output.
C = F [Q]

3. SHORT
RUN COST
COST
LONG
RUN COST

4. 

An analysis in which certain factors are
assumed to be fixed during the period
analyzed.
In short run output can be increased or
decreased by changing only the variable
factors.

5. Fixed cost
+
Short
run cost
Variable cost
=
Total cost

6. 

Fixed cost are those cost which do not
change with changes in output.
Fixed cost are otherwise called
‘supplementary cost’ or ‘over head costs’.
Eg ; Rent on land and building , Insurance
charges, Interest on fixed capital, Salary
of permanent employees.

7. 

Variable cost are those costs which
changes with changes in output.
Variable cost are also called ‘prime cost’.
Eg; cost of raw materials, cost of power in
production, wages of workers.

8. 

Total cost is defined as the Total actual cost
that must be incurred to produce a given
quantity of output.
Fixed cost and variable cost are formally
called Total fixed cost and Total Variable
cost.
TC = TFC + TVC

9. UNITS OF OUTPUT
TFC
[Rs.]
TVC
[Rs.]
TC
[Rs.]
0
60
60 -60 = 0
60
1
60
100 -60 = 40
100
2
60
120 – 60 = 60
120
3
60
70
130
4
60
100
160
5
60
160
220
6
60
300
360

11. .............



TFC being fixed at Rs.60, remains the same
at all levels of output . Thus, the TFC- curve
is a straight line parallel to the x-axis.
TVC – curve starts from the origin at zero
output . It move upwards from left to right.
The shape of TC –curve is the same as TVCcurve.

12. SHORT
RUN
AVERAGE
COST
AVERAGE FIXED
COST
AVERAGE
VARIABLE COST
AVERAGE
FIXED COST

13. 
AFC is the per unit fixed cost of
producing a commodity. It is obtained by
dividing the total fixed cost by the
quantity of output [Q].
AFC =
TFC
Q

14. 
AVC is the per unit variable cost of
producing a commodity . It is obtained by
dividing the total variable cost by the
quantity of output.
AVC
=
TVC
Q

15. 
AC is the sum total of AFC and AVC.
AC
=
TC
Q

16. 
MARGINAL COST ; Marginal cost is the
addition to total cost by the production of
an additional unit of output.
;w
MCn = TCn - TCn-1

17. Units of TFC
producti [Rs]
on
TVC
[Rs]
TC
[Rs]
AFC
[Rs]
AVC
[Rs]
ATC
[Rs]
MC
[Rs]
O
60
0
60
-
-
-
-
1
60
40
10
60
40
100
40
2
60
60
120
30
30
60
20
3
60
70
130
20
23.3
43.3
10
4
60
100
160
15
25
40
30
5
60
160
220
12
32
44
60
6
60
300
360
10
50
60
140

19. 



The short –run MC curve will at first decline
and the ATC and AVC at their minimum
points.
The AVC curve will go down , and then go
up.
AFC curve will decline as additional units
are produced , and continue to decline.
ATC curve initially will decline as the fixed
cost are spread over a large number of units ,
but will go up as MC increase due to the law
of diminishing returns.