To understand the conept of costs

ASSIGNMENT OF ECONOMICS

TOPIC : TO UNDERSTAND THE CONCEPT OF COSTS


Short run is a period within which the firm can increase its output by varying only the amount of variable factors such as labour and raw materials.In the short run fixed factors such as capital equipments,top management personnel etc. cannot be varied.

Long run is a period of time during which the quantities of all factors variable as well as fixed can be adjusted.Thus in the long run output can be increased by increasing capital equipment or by increasing the size of the existing plant.

Fixed cost: Fixed costs must be paid even though production has been stopped temporarily. They include rent of the factory building,interest on capital and salaries of the permanently employed staff.

Variable cost: Variable costs vary with the output. These costs include the cost of raw materials used in the making of the commodity as well as the costs of daily labour employed.

Total cost: Total cost is the sum of fixed cost and variable cost.

TC=TFC+TVC

AVERAGE FIXED COST=TFC/Q

AVERAGE VARIABLE COST=TVC/Q

AVERAGE COST=TC/Q

AVERAGE COST=AFC+AVC

MARGINAL COST= CHANGE IN TOTAL COST/CHANGE IN Q


Shut Down Price

In The Short Run: In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way so long as price per unit> or equal to average variable cost(AR=AVC)

In The Long Run: A business needs to make at least normal profit in the long run to justify remaining in an industry .

If in the short run average revenue is greater than the average variable cost then a firm could exist. If it is not so it has to shut down.

GRAPHICALLY

At point P1 and Q1(Where marginal revenue equals to marginal cost)the firm would shut down in the short run as price is less than average variable cost. The loss per unit of producing is vertical distance AC. On the other hand average revenue AR2 and marginal revenue MR2 lies below average cost across the full range of output, so whatever output is produced,the business faces making an economic loss.

.