STUDY SOLVE:Theory Of Cost Of Production

Theory of cost of production are discuss under bellow-STUDY SOLVE
The short run and the long run: The short-run can be defined as a period which is long enough to permit any desired change of output technologically possible without altering the scale of plant but which is not long enough to permit any adjustment of scale of plant.
On the other hand, the long run is a period which is sufficiently long enough to permit any desired change of output technologically possible altering the scale of plant and which is long enough to permit any adjustment of scale of plant. heory of cost of production 


Fixed costs:
            Fixed costs are the costs of all those factors of production whose amount can’t be altered quickly in the short-run. The fixed costs are mainly those costs of the fixed plant and equipment of the firm. The clearest way to define fixed costs is to say that they are costs that continue it the firm temporarily shut down producing nothing at all. Fixed costs include such items as interest on investment in the plant and equipment, most kinds of insurance, property taxes, depreciation and maintenance etc. and wages of those people who continue to be employed even in a temporary shut-down. Total cost to employ fixed inputs. Fixed costs do not change as output levels change.heory of cost of production 

Variable costs:
Variable costs are those costs that vary with the volume of output. They must necessarily rise as the firms output increase, since larger output require larger quantities of variable resources and hence, larger cost obligations. They include wages, payment for raw materials and other goods bought by the firm, payment for fuel, interest on short-term loans etc.

 

SHORT-RUN TOTAL COST CURVES

Cost curves show the minimum cost of producing various levels of output. In the short run, one or two factors of production are fixed in quantity. Total fixed costs (TFC) refer to the total obligations incurred by the firm per unit of time for all fixed inputs. Total variable costs (TVC) are the total obligations incurred by the firm per unit of time for all the variable inputs it uses. Total costs (TC) equal TFC plus TVC.

Table 1.1 presents hypothetical TFC, TVC, and TC schedules. These schedules are plotted in fig. 1-1.

 

Table 1.1


Quantity of output
Total fixed cost
Total variable cost

Total cost
0
60
0
60
1
60
30
90
2
60
40
100
3
60
45
105
4
60
55
115
5
60
75
135
6
60
120
180



 Suppose an entrepreneur has a fixed plant that can be used to produce a certain commodity. Further suppose this plant cost $ 60. Total fixed cost is, therefore, $ 60 – it is constant irrespective of the level of output. This is reflected in Table/ Schedule 1.1 by the column of $ 60 entries labeled “Total fixed cost.” It is also shown by the horizontal line labeled TFC in Figure 1-1. Both table and graph emphasize that fixed cost is indeed fixed.

Variable inputs must also be used if production exceeds zero. The greater the level of variable input the greater the total variable cost of production. This is shown in column 3 of table 1.1 and by the curve labeled TVC in Fig 1-1.
Summing total fixed and total variable cost gives total cost, the entries in the last column of table 1.1 and the curve labeled TC in Figure 1-1. From the figure, we see that TC and TVC move together and are, in a sense, parallel. That is to say, the slopes of the two curves are the same at every output point; and at each point, the two curves are separated by a vertical distance of  $ 60, the total fixed cost. Theory of cost of production 

Blogroll