DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH

Name : P. Sankara Rao

Designation : Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Polytechnic, Srikakulam
Year/Semester : V Semester
Subject : Business Economics I
Subject Code : CCP 502
Topic : Cost & Revenue Analysis
Duration : 50 mts.
Sub Topic : Behaviour of Cost curves
Teaching Aids : PPT & Animation

CCP 502.52 1
Objectives

On completion of this period, you would be

able to:
 Understand the behaviour of cost curves
 Understand the concept of cost-output relationship
 Know about various short run cost curves
 Identify the nature of long run cost curves

CCP 502.52 2
Recap

In the previous session we have learned

 Meaning of costs

 Types of costs

CCP 502.52 3
Introduction
 The costs and output are related.
 Cost of production depends upon several factors
such as:
 Quality of output
 Price of Factor Inputs
 Quality of Factor Inputs employed
 Efficiency of factors
 Scale of production
 Efficiency of Management etc.,

CCP 502.52 4
 The cost-output relationship significantly differs in
the short-run and in the long-run. It is because, in the
short-run the costs can be classified into fixed costs
and variable costs.

CCP 502.52 5
Cost-output Relationship

Cost-output relationship facilitates many managerial

decisions such as:
Formulating a rational policy on plant size and
the
standards of operation.
Expense control
Profit prediction

CCP 502.52 6
Short –Run Cost Curves
Costs in the short-run are classified into fixed
costs and variable costs. The fixed costs may be
ascertained in terms of total fixed cost and average
fixed cost per unit. The variable cost can be
determined in terms of average variable cost, total
variable cost. The following table explains the
behaviour of cost in the short run.

CCP 502.52 7
Breakdown Of Cost

MONTHLY TOTAL TOTAL TOTAL AVERAGE AVERAGE AVERAGE MARGINAL

OUTPUT FIXED VARIABLE COST FIXED COST VARIABLE TOTAL COST
(UNITS) COST COST COST COST

A B C D= B+C E=B/A F=C/A G=D/A H

0 100 0 100 - - 100 -
1 100 30 130 100 30 130 30
2 100 54 154 50 27 77 24
3 100 72 172 33.3 24 57.3 18
4 100 96 196 25 24 49 24
5 100 150 250 20 30 50 54
6 100 216 316 16.6 36 52.6 66
7 100 320 420 14.2 45.7 69.9 104
CCP 502.52 8
Table Explanation

 Total fixed costs remains fixed irrespective of

increase or decrease in production activity.
 Average fixed cost per unit declines as the volume
of production increases.
 The total variable cost increases proportionately
with the production.
 The total cost increases with volume of production.

CCP 502.52 9
Diagrammatic Representation
 The behaviour of various cost curves is shown in
the following diagram:

Cost

Output

CCP 502.52 10
Diagram Explanation:
 It can be noticed that the output goes on increasing,
average fixed cost curve (AFC) will continue to
decrease. Hence, AFC curves slope downwards.
 The average variable cost curve (AVC) is a U-
shaped curve.
 ATC curve in the initial stage will be nearer the AFC
curve and in the final stage will be nearer to AV
curve.
 The marginal cost curve is also a U shaped curve. It
falls in the beginning and rises sharply.

CCP 502.52 11
Long Run Cost Curves

 Long run refers to that period of time over which all

factors are variable. It has no constraints in terms of
resources. It has no fixed costs. All costs are
variable.
 Hence, the long run costs refer to the costs of
producing different levels of output by changing the
scale of production.
 It is also called as planning curve, Tangent curve or
envelope curve.

CCP 502.52 12
Diagram
Various short run cost curves are shown in a
single long run cost curve which also known as
“envelope curve”.
Long- run Average Cost curves (LAC)
Enveloping series of SACs
Cost

Output
CCP 502.52 13
Diagram Explanation

 Above diagram shows how LAC curve envelops

several short-run average cost (SAC) curves and
suppose the firm is producing an output OX1 units
on a plant of SAC1.
 If it wants to produce OX2 units of output, either it
can operate on SAC1 by over utilizing SAC1 or by
accruing a bigger size plant SAC2 and operating
on it. It will be less costly to operate on SAC2.

CCP 502.52 14
Contd…
Diagram Explanation

If the firm wants to produce OX3 units of output, it

can operate on the bigger size plant SAC3 at least
cost. A3 is the least cost at the output OX3 and the
firms attains optimum output in the long-run at OX3
level of output.

CCP 502.52 15
Summary

In this session we have learned

 Behaviour of cost curves
 Concept of cost output relationship
 Various short run cost curves
 Nature of long run cost curves

CCP 502.52 16