24-09-2012, 03:54 PM
COST – OUTPUT RELATIONSHIP
COST – OUTPUT.pptx (Size: 458.51 KB / Downloads: 21)
average fixed cost and output
The greater the output, the lower the fixed per unit, i.e., the average fixed cost. The reason is that total fixed costs remain the same and do not change with the change in output.
The relationship between output and fixed cost is a universal one for all type of business.
Average fixed cost falls continuously as output rises.
The shape of the average fixed cost is a rectangular hyperbola.
averge variable cost and output
The average variable costs will fall and then rise as more and more output is produced.
As we add more units of variable factors in a fixed plant, the efficiency of the input first increase ,then decreases and reaches optimum level. Once the optimum level is reached , any further increase in output will increase average variable cost quite shalply.
In the above connection the following points are to be noted:
The LAC curve is tangential to the various SAC curves. It is said to envelop them and is often called as the “Envelop Curve” since no point on SAC curve can ever be below the LAC curve.
The LAC curve is U-shaped or like a dish. The U-shape of the LAC curve implies lower and lower average cost in the beginning until the optimum scale of the enterprise is reached, and successively higher average costs thereafter, i.e., with plants larger than that of the optimum scale.
The long run average cost curve can never cut a short-run average cost curve. This implies that for any given output, average cost cannot be higher in the long -un than in the short-run.
LAC curve will touch the optimum scale curve at the latter’s least-cost point.
LAC curve will touch SAC curves lying in the left of the optimum scale curve at the left of their least-cost points.
LAC curve will touch SAC curves lying to the right of the optimum scale curve at the right of their least cost points.