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    Lecture 21 - Cost Analysis

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    technical analysis
    The document discusses cost output relationships in the long-run. It explains that in the long-run, all factors of production are variable. The long-run total cost curve, also called the planning curve, guides entrepreneurs on expanding output over time. The long-run average cost curve is flatter and U-shaped, relating the cost of production at different output levels in the long-run. Economies of scale from increases in firm size can lead to a downward shift in the long-run average cost curve through realization of internal and external economies. Minimum efficient scale is the lowest point on the long-run average cost curve, indicating optimal input usage and minimum average cost.

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    Lecture 21 - Cost Analysis

    Uploaded by

    technical analysis
    9 views11 pages
    The document discusses cost output relationships in the long-run. It explains that in the long-run, all factors of production are variable. The long-run total cost curve, also called the planning curve, guides entrepreneurs on expanding output over time. The long-run average cost curve is flatter and U-shaped, relating the cost of production at different output levels in the long-run. Economies of scale from increases in firm size can lead to a downward shift in the long-run average cost curve through realization of internal and external economies. Minimum efficient scale is the lowest point on the long-run average cost curve, indicating optimal input usage and minimum average cost.

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    Lecture 21_Cost Analysis

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    The document discusses cost output relationships in the long-run. It explains that in the long-run, all factors of production are variable. The long-run total cost curve, also called the planning curve, guides entrepreneurs on expanding output over time. The long-run average cost curve is flatter and U-shaped, relating the cost of production at different output levels in the long-run. Economies of scale from increases in firm size can lead to a downward shift in the long-run average cost curve through realization of internal and external economies. Minimum efficient scale is the lowest point on the long-run average cost curve, indicating optimal input usage and minimum average cost.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    9 views11 pages

    Lecture 21 - Cost Analysis

    Uploaded by

    technical analysis
    The document discusses cost output relationships in the long-run. It explains that in the long-run, all factors of production are variable. The long-run total cost curve, also called the planning curve, guides entrepreneurs on expanding output over time. The long-run average cost curve is flatter and U-shaped, relating the cost of production at different output levels in the long-run. Economies of scale from increases in firm size can lead to a downward shift in the long-run average cost curve through realization of internal and external economies. Minimum efficient scale is the lowest point on the long-run average cost curve, indicating optimal input usage and minimum average cost.

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    © All Rights Reserved
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    of 11

    Program - MBA

    Course – ‘Managerial Economics’


    Lecture – 21 (Unit 3)
    Cost Output Relationship in the Long-Run

    By
    Sadananda Prusty, PhD
    Professor & Dean-Academics
    Jaipuria Institute of Management, Ghaziabad
    Content

    • Cost Output Relationship in the Long-Run


    Cost Output Relationship in the Long-Run
    • In the long-run all the factors of production are assumed to be variable. The long-run
    cost curve is also known as the planning curve, in the sense that it is a guide to the
    entrepreneur in his decision to plan for the future expansion of output
    • Long-Run Total Cost (LTC)
    200

    Long Run Total Cost ($)


    LTC
    K

    150

    100
    Input b

    50

    0
    0 5 10 15 20 25
    Production Output (Q)

    • Long-Run Total Cost is the least cost combination of inputs for each production
    quantity (derives from the expansion path)
    Cost Output Relationship in the Long-Run
    • Long-Run Average Cost Curve: It relates to the cost-output relation in the long-
    run. It is a flatter U-shaped curve
    • Derivation of the LAC Curve

    The long-run average cost (LAC) is the locus of the tangency points of the short-
    run average cost (SAC) curves
    Cost Output Relationship in the Long-Run
    • The LAC and the LMC Curves relationship

    • When LAC falls, LMC lies below it, i.e. LAC > LMC
    • When LAC is minimum, LAC = LMC
    • When LAC increases, LMC is above LAC, i.e. LAC < LMC
    Cost Output Relationship in the Long-Run
    • Internal Economies-Diseconomies and the LAC Curve

    • The Effect of External Economies


    Cost Output Relationship in the Long-Run
    Economies of Scale
    • The scale economies determine the shape of the
    LAC curve. Internal economies of scale (i.e.,
    economies which arise from the firm increasing
    its plant size) and changes in external economies
    of scale (i.e., improvement in technology and
    reduction of factor prices in the industry or the
    economy as a whole) will result in a downward
    shift of the LAC curve
    • Economies of scale are distinguished into real economies and strictly pecuniary
    economies of scale
    Cost Output Relationship in the Long-Run
    • Real economies are those associated with a reduction in the physical
    quantity of inputs, raw materials, various types of labour and
    various types of capital (fixed or circulating capital).
    We may distinguish different types of real economies
    such as production economies, selling and marketing
    economies, managerial economies, and transport and
    storage economies. The last two categories are partly
    production and partly selling costs
    Cost Output Relationship in the Long-Run
    • Pecuniary economies are economies realised from paying lower prices for the
    factors used in the production and distribution of the product due to bulk-buying
    by the firm as its size increases. Such strictly monetary
    economies do not imply an actual decrease in the quantity
    of inputs used but accrue to the firm from lower prices
    paid for raw materials (bought at a discount due to the large
    volume of purchase), lower interest rates (i.e., lower cost of
    finance) as the size of the firm increases, or lower wages
    and salaries. Lower salaries (and sometimes lower wages) may
    be paid by larger firms if there is some prestige associated
    with the employment by such firms. It is often observed that
    employees prefer to work for a larger firm whose name is
    known, even if they could earn more by working for a small unknown firm
    Cost Output Relationship in the Long-Run
    • The Effect of External Diseconomies

    • Minimum Efficient Scale: It refers to the lowest point on the long-run


    average cost curve, implying optimum use of factor-input and minimum
    average cost
    THANK YOU

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