The average costs will start rising rapidly. These concepts of costs are very important for the management when they have to make decisions regarding the continuance of existing plant, suspension of its operations or its closure. The long run average total cost or LAC curve of the firm shows the minimum average cost of producing various levels of output from all-possible short-run average cost curves (SAC). It means that the LAC curve first falls slowly and then rises gradually after a minimum point is reached. Fixed costs have to be incurred by the firm, even if it stops production temporarily. In fact, they have to be incurred even when the firm stops production temporarily. Historical cost of assets is used for accounting purposes, in the assessment of net worth of the firm, while the replacement cost is used for business decision regarding the renovation of the firm.
A resource will always be used in that business where it will have the highest opportunity cost. They are considered while finalising the profit and loss accounts. The short-run average costs of a firm are the average fixed costs, the average variable costs, and the average total costs. Two major results emerge predominantly from most studies. 2, 50,000, the actual cost of Rs.
If P is the point on the total cost curve at a given output Q, then the average cost is to be read off as the gradient of OP and the marginal cost as the tangent at P. This is shown in Figure 17. These costs are also called avoidable costs or controllable costs. When, say the quantities of a variable factor like labour are increased in equal quantities, production rises till fixed factors like machines, equipment, etc. The relation between total costs, variable costs and fixed costs is presented in Table 1, where column (1) indicates different levels of output from 0 to 10 units. They are the earnings of owner’s resources employed in their best alternative uses. This would lead to diminishing returns. First, the SAVC and SMC curves are constant over a wide-range of output. Private costs are the costs incurred by a firm in producing a commodity or service. One can, therefore, draw a “learning curve” which relates cost per airframe to the aggregate number of airframes manufactured so far, since the firm started manufacturing them. Normal profit is the minimum profit required for the existence of a firm. Included in these Channels: They are realised by a firm when other firms in the industry make inventions and evolve specialisation in production processes thereby reducing its per unit cost.
The total cost function and the TC curve relate total cost to output under given conditions. 300) whatever the level of output. For example, the same piece of leather may be used for slippers or shoes. As a result, efficient allocation of resources will also be possible. Here, costs include imputed value of the entrepreneur’s own resources and services, as well as the salary of the owner-manager. It cannot be altered, increased or decreased by varying the level of activity or the rate of output. Let there be three plants represented by their short-run average cost curves SACThe firm will, however, use the scale of plant represented by SACBut it would be more profitable for the firm to produce the larger output OM at the lowest average cost ME from this plant. However, it is difficult to estimate indirect effects such as the closure of an unprofitable business unit which will reduce costs but will increase the other related expenses like transportation charges, etc.
The elasticity of productivity is defined as the ratio of proportional change in output to the proportional change in inputs.