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Short Run Costs: The level of output in any industry depends on two factors. i) The number of firms in the industry and ii) The size of firms or the scale of then operation. The short period is that one, which is long enough to permit any desiced change of output altering the scale of output.
Fixed costs:
The costs incurred on factors of production which are fixed in the shortrun. Ex: Cost of running fixed equipment, salaries of administration staff, depreciation of machinery etc., These are the costs incurred even at zero output. These costs remain fixed in the short-run only.
TC = -----O
TC = -----O
5 (4/1) 6 (2+4)
7 (6/1)
1.
2. 3. 4. 5.
20
20 20 20 20
20
10 6.6 5.0 4.0
10
18 24 30 40
10
9.0 8.0 7.5 8.0
30
38 44 50 60
30
19 14.6 12.5 12.0
6.
7. 8.
20
20 20
3.6
2.85 2.50
54
70 88
9.0
10.0 11.0
74
90 108
12.3
12.8 13.5
14.0
16.0 18.0
Marginal cost: It is the addition to the total cost caused by producing one more unit. It is the increment in aggregate costs when output is increased by one unit; or the reduction in cost which follows the reduction of output by one unit. It is the difference between total cost of N units and total cost of N-1 units. TC Marginal cost = ------Q Change in Total cost = ----------------------------Change in Output
Relation Between AC & MC:It is very important in price theory. Both AC & MC are calculated from the total cost.
Output (units ) Total Cost (Rs.) Average Cost (Rs.) Marginal Cost (Rs.)
1 2 3 4 5 6 7 8
10 18 24 28 35 48 63 80
10 9 8 7 7 8 9 10
-8 6 4 7 13 25 17
Total cost AC = -----------------Total output Change in total cost TC MC = ------------------------------- MC = -------Change in output Q i) When AC is falling, MC also declines but MC < AC. MC
Assumptions :1. The total cost can be divided into fixed and variable costs.
Usefulness of BEA:1. It provides a micro scope view of the profit structure of the firm which will help the firm in planning profit.
without causing losses. Sales BEP Safety margin --------------------- x 100 Sales
5. It is useful in determining target profit sale volume. TFC Target Profit Target Sales Volume = --------------------------Contribution margin
Limitations:
1. Difficult to apportion all costs (whether fixed or variable) 2. Selling price does not remain constant sales do not change in direct proportion to output.