91

a) Cost output realtionship in the short run:

Short run condition is defined as that pericd during which supplies
of a commodity can be changed by increasing or decreasing tne output
without changing the exicling plant and machinery. In other words in
the short nun the firm cannot build a new plant or discard an old
one.
do so
If the firm wants to increase production in the short run it can
only by over working the existing plants, by hiring more workers and
buying more raw materials. It can not increase its output in the shortrun
new plant of
by enlarging the size of ite existing plant or building a
in the
a larger size. In economic theory the cost output relationship
short run may be studied in term of

a) Average fixed cost

b) Average variable cost
c) Short run marginal cost
d) Short run average cost

a) Average fixed cost:

The cost output relationship
which is shown by the average
cost curve in the shortrun
consists of an average fixed and
variable cost. AFC is the fixed
cost per unit of output. The
following graph showsthe AFC
curve. In fig(1) the cost is higher
in smaller levels ot output and
cost is lower at a higher levels AFC
of output. The AFC curve
therefore is represented by O 1) oput
rectanglar hyperbe:a as shown in the fig 1 That is nte te p u
increase the average fixed cost ceceases because the urganiser wl
be producing more and more output wth the samme plant and he

machinery so that tha faed cosi remans tne same in tre snort run
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mora the average fixed costs,

On the ofher hand lesser the output
Syribolically AFC FC
output.

b) Average Variable Cos:

The AVC will first fall and then rise
as more and more units ore Y
produced in the given plant. This
is shown in fig.2 because as we
add more units of variable factor
in a fixed plant and machinery
Behind the AVC is the law of
diminishing returns. in the
beginning. when htumber of the
variable factors like raw-materials.
electricity trasportation etc. 1s
(fig. 2) output X
employed used with the fixed
or

factors the iotal output increases

more than proportionately. But after a poirit the total output starts
increasing less than proportionately with greater ermployment or use
of the variable factors and average variable cost of production goes on
increasing. Symbolically AVC VC/output.
c) Short run Margina! y
Cost: Marginal cost is the rate at
which total cost changes ith
output i.e, the slope of total cost
curve. it is. the rate of change in
totel cost with
respect to a unit
change in output. i.e., shownin
fig.3
additiona TC.
MC additionäl output.
(lig. 3) oulpu:
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For eg., cost of preparing 100 meals is Rs.5C0 and 110 mos.
is Rs.600 then MC = Rs.100 that Is additidnal total,costs (Rs. 10 enls
to prepare additional meals (10 meals) MC = 100 Rs100)
10 Rs.10
d)AverageTotalCost: The
ATC or more commonly known as
AC
AC declines first and then rises
upwards. The significant print too
be noted here is that the terning
point M. The addition of the AVC
of production to the AFC of
production gives the average cost
curve of short run which wilh.be a M
U'shaped curve asshownin fig.4. o (ic 41 culput X
At sirst AC is high due to large fixed cost and'smalf output. As outpu
increases the fixed cost is thinly spread over the larger number of units

produced and the AC accordingly falls. This is due to the fullest use
returns sets
of the plant, machinery, labour etc. But when diminishing
is due to difficulties of management and limitations of plants, capacity
increase in
spåce, the varibale costs increases which leads
to
and
lower end of the curve turns up and gives it
average costs. So,the
a U-shape
Cost of production of a Firm
Eg.
Units of | Total Total Total Average/Average
Average Margina
cost
Cost fxed variable cost
output Fixed variable|
cost costcost| cost
(243) (2+1) (31)(5+6)
4 5 6 7
3
30 10
3 30 40
10 40 30 8
30 9 24
18 48 15 6
2 30 18
24 54 10 8
3 30 7.5 8 15.5
32 62 16. 16
30 80 6 19
30 50
5
102 5 12 17
5 30 72
Cost
Curves
hert run outputcoat Guryes
curves)
different cost
Rlationship between AG
The cost output realtionship y

can also be shown with the hel

of a graph. itis seen in fig.5 that
the AFC curves falls. tis higher
at smaller levels of output and ac
ower at higher levels of outpul.MC.
AVC
The shape of the AFC curve
FC
ectangular hyperbola. The AVC
AFC
Curve is first falls and thenrises,
aiso the ATC curve. However
the AvC curve startsrising earlier O(fig. 5) output
hen the ATC curve. Further the
to the point LT on'the, ATC curve
east cost level of output corresponds
and not the point LV which is less on the AVC curve.

Another important point to be noted on the

above fig.5 is that
ATG Curve at
MC intersects both the AVC, curve and the
the curve
If MC is less
ieir minimum points. This is very simple to explain.
AC will AC dow. If the MC; is greater than the AC
than the it pul
neither pull AC up
itwill
willi pull AC up. If the MC is equl to AC
Similar
down. Hence MC will intersect the AC at its lower point.
is the position of AVC curve. The interrelationshipbetween AVC and
TC and AFC can be summed up as foliowS:
1. If both AFC and AVC falls ATC will fall.
2. 1f AFC falls but AVC rises,
a) ATC will fall vhere the drop in AFC is more than the rise in
AVC
b ) ATC will nottallwhere drop in AFC is equal to the risu in AVC.
c) ATC will rise vhere the drop in AFC is tess than the rise in
AVC.