This document discusses cost-output relationships in both the short run and long run. In the short run, costs are analyzed using average fixed cost, average variable cost, and average total cost. Average fixed cost decreases with more output while average variable cost first decreases and then increases. Average total cost initially decreases and then increases. In the long run, all factors of production can be varied. Total cost, average cost, and marginal cost are analyzed. The long run cost curve is derived by combining multiple short run cost curves and joining their tangency points. Long run costs are important for determining optimal scale and size through considering factors like demand forecasts and profits.

1. Presenting by
IBRAHIM NOUMAN M H
SREEBA .V
ANUSREE

2. Cost- output relationship has two aspects
1. Cost –output relationship in short run
2. Cost –output relationship in long run
 The short run is a period which does not permit alterations in
the fixed equipment and in the size of the organization.
 The long run is a period in which there is sufficient time to
alter the equipment and the size of the organization . output
can be increased without any limits being placed by the fixed
factors of production.

3. COST –OUTPUT RELATIONSHIP IN SHORT RUN

4. Short run may be studied in terms of
Average fixed cost
Average variable cost
Average total cost
Average fixed cost
The greater the output ,the lower the fixed cost per unit
i.e. the average fixed cost . Total fixed cost remain the
same and do not change with a change in output.

5. Average variable cost
 The average variable cost will first fall and then rise
as more and more units are produced in a given
place.
 E.g. electricity charge , labour cost.etc.

6. AVERAGE TOTAL COST
Average total cost , also known as average cost , would
decline first and then rise upwards.
Average cost consists of average fixed cost plus average
variable cost
Average fixed cost continues to fall with an increase in
output while average variable cost first declines and then
rises.
When the rise in AVC is more than the drop in average
fixed cost that the average total cost will show a rise.

7. MC
ATC
AVC
AFC

8. COST - OUTPUT RELATION IN LONG RUN

9.  Long run period enables the producers to change all
the factor and will be able to meet the demand by
adjusting supply . change in fixed factors like
building , machinery , managerial staff etc.
 All factors became variable in the long run
 In the long run we have 3 costs i.e. total cost. ,
Average cost and Marginal cost.
 Total cost TC =TFC +TVC
 Average cost AC=TC/output
 Marginal cost MC =change in TC as a result of
change in output by one unit

10. When all the short run situations are combined , it
forms the long run industry.
During the short run . Demand is less and the plant’s
capacity is limited .when demand rises ,the capacity of
the plant is expanded .
When short run average cost curves of all such
situations are depicted , we can derive a long run cost
curve out of that.
We can make a long run cost curve by joining the
tangency points of all short run curves.

11. We use long run costs to decide scale issues , for
example mergers.
In the long run , we can build any size factory we wish ,
based on anticipated demand , profits , and other
considerations.
Once the plant is built , we move to the short run .
Therefore , it is important to forecast the anticipated
demand . Too small a factory and marginal costs will
be high as the factory is stretched to over produce.
Conversely too large a factory results in large fixed
costs and low profitability

13. THANK YOU