Output and Costs

Rabia Khan Syed Abdul Haseeb

Abdul Wahid Khan

Time framesThe two major types are:

Short-run

Long-run

Short-run time frameA time frame in which the quantities of some

resources are fixed (Technology, building and capital)

A “plant” is a collection of fixed resources of the firm

For short run time frames increasing the quantity of variable inputs increases the output of the firm. (e.g Labour)

As the term implies it is easily reversible.

Long-run time frame

A time frame in which the quantities of all the resources can be varied.

Therefore the firm’s plant is changed, and so it is relatively harder to reverse long run decisions.

Sunk costsThe past cost of buying a plant without any

resale value is known as a sunk cost, the sunk cost does not influence the firm’s decisions. Short run and long run costs, however do.

Short run technology constraintsTotal product

Marginal product

Average product

Product schedules and product curves help illustrate these concepts.

The following table explains how total, average and marginal costs are displayed.Units of Output

nTotal Cost

TCAverage Cost

ACMarginal Cost

MC Rs. Rs. Rs.1 1.10 1.10 1.102 1.60 0.80 0.503 1.75 0.58 0.154 2.00 0.50 0.255 2.50 0.50 0.506 3.12 0.52 0.627 3.99 0.57 0.878 5.12 0.64 1.139 6.30 0.70 1.18

10 8.00 0.80 1.70

Total Product CurveThis is a total product curve.

The total product curve is similar to the PPF.

It separates attainable output levels from unattainable output levels in the short run.

Marginal Product Curve

It shows the marginal product of labor curve and how the marginal product curve relates to the total product curve.

The first worker hired produces 4 units of output

The second worker hired produces 6 units of output and total product becomes 10 units, so on …

To make a graph of the marginal product of labor, we can stack the bars in the previous graph side by side.

The marginal product of labor curve passes through the mid-points of these bars.This gives us Increasing marginal returns initially Diminishing marginal returns eventually

Average Product Curve shows the average product curve and its relationship with the marginal product curve.

When marginal product exceeds average product, average product increases

When marginal product is below average product, average product decreases

When marginal product equals average product, average product is at its maximum

Short-run Costs

This curve shows ;

Marginal Cost

Average Total Cost

Average Variable Cost

Average Fixed Cost

Short-run costs

Long-run Cost

Economies and Diseconomies of scale

Constant returns to scaleFeatures of a firm’s technology that lead to

constant long-run average cost as output increases. Therefore in this case the Long-run average cost curve will be a horizontal straight line.

This would mean for a certain increase in input let’s say “x” the increase in output would be “x” as well.

Minimum efficient scaleAt a certain point in the Long-run average

cost curve, the smallest quantity of output where the cost is at it’s lowest level. It is efficient for the firm to balance it’s output and costs at this level, since a low cost is offering a fairly high output.

Comparison

THANK YOU