COST -OUTPUT RELATIONS
Cost output relations play an
important role in business decisions pertaining to cost minimisation or
profit-maximisation and optimisation of output. Cost output relations are
expressed through a cost function.
Short run Cost Output Relations
The basic analytical cost
concepts used in the analysis of cost behaviour are total,average and marginal
costs.The total costs is defined ass the actual cost that must be incurred to
produce a given quantity of output. The short run total cost is composed
of two major elemnts:total fixed cost(TFC) and total variable cost(TVC).
That is in the short run,
TC = TFC
+ TVC
Long run Cost Output Relations
By definition,in the long run,all
the inputs become variable.The variability of inputs is based on the assumption
that in the long-run ,supply of all the inputs including those held constant in
the shortrun becomes elastic. The firms are therefore in a position to expand
the scale of their production run by hiring a larger quantity of all the
inputs.The long run output relations therefore imply the relationship between
the total costs and the total outputs ,whereas in the short run this
relationship is essentially one between the total output and the variable costs
because fixed costs remain constant.
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