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.