Then any person undertakes business it does have a reserve capacity in building as well as in land. But, if it is hired, that is out-of-pocket cost. This is because even when no output is produced, the firm has to incur fixed costs. Long run Cost Curves Long run refers to, a firm can vary all inputs even fixed inputs. But after a minimum point, average variable cost stops falling but not the average cost. Each producer thinks that the demand for his product will rise in future.
Price changes over time cause a difference between historical costs and replacement costs. Incremental Costs and Sunk Costs: Incremental costs denote the total additional costs associated with the marginal batch of output. Therefore, they vary with changes in them. It cannot be altered, increased or decreased by varying the level of activity or the rate of output. This can change according to the demand for the production.
Usually, the factors that determine the total cost of production C of a firm are the output 0, the level of technology T , the prices of factors P f and the fixed factors F. It should be noted that with the increase in aggregate production of a commodity over time, learning gained by a firm is not only in respect of improving efficiency in physical operations in the production of a commodity but also in respect of improving the organisation of the plant. Except for greenhouses, the vast majority of farms that grow crops cannot grow them indoors; with a vast amount of acreage to cover, it is impossible to grow cereal, oilseed or pulse crops under a climate-controlled area. For examples- Payments of electricity bills -Wages paid to workers - Payment of raw mon. The plant and equipment can be altered and adjusted to the output. Managerial Costs: In modern firms, for each plant there is a corresponding managerial set-up for its smooth operation.
Explicit Costs and Implicit Costs: Explicit costs are those payments that must be made to the factors hired from outside the control of the firm. Then the distinction between fixed cost and variable costs must be kept in mind. The reason behind this is that whereas average cost is the aggregate of average fixed cost and average variable cost, marginal cost refers only to change in average variable cost. In other words we can say that so long as the marginal revenue product of labour is higher than the cost of employing him, the employer employs that worker. In the long-run, firms expand their production, employ more men, materials, machinery and equipment. When increasing quantities of variable factors are applied on the fixed factors, the law of variable proportions operates. It means the cost of a plant at a price originally paid for it.
In classical economics, no distinction was made between profits and interest. This is illustrated in Fig. If the firm expands its output further than this optimum level, diseconomies of scale arise. There are various concepts of cost that a firm considers relevant under various circumstances. The elasticity of productivity is defined as the ratio of proportional change in output to the proportional change in inputs. Past Costs and Future Costs: Past costs are the costs which have been actually incurred in the past. It is now common knowledge that a person learns while doing some productive work.
Time and Costs On the basis of time element costs can be classified in to two. This is natural because when constant total fixed costs are divided by a continuously increasing unit of output, the result is continuously diminishing average fixed costs. Simply, implicit cost refers to the cost on self owned resources by the producer. The difference between the, two was one of degree, and not of kind. According to traditional theory of cost curves , cost curves are U-shaped. They are a Short run period b Long run period In short run period the producer cannot change the fixed capital or factors of production like land, building etc. Learning: Another reason for the L-shaped long- run average cost curve is the learning process.
As the output continues, marginal cost becomes minimum, thus, ultimately starts rising. This curve does not turn up at very large scales of output. For example: land, buildings, machinery etc. The curves relating to these three total costs are shown diagrammatically in Figure 2. For example, in figure 4. Corporate Finance, Investment and Taxation Laboratory Research Consortium of Universities of the South of Russia Rostov-on-Don Russia About this chapter Cite this chapter as: Brusov P.
These costs include all types of fixed costs, the costs of sheltering plant and equipment, lay-off expenses, employment and training of workers when the operation is restarted. Their argument was simple, and for that reason it could be used effectively in popular criticism of the existing economic order. This is so due to reductions in the production costs when a large volume of output is produced. Actual Costs and Opportunity Costs: Actual costs refer to the costs which a firm incurs for acquiring inputs or producing a good and service such as the cost of raw materials, wages, rent, interest, etc. Suppose a manager can earn Rs. The demand for labour will be elastic if cheaper substitute of the product are available in the market or the demand for the commodity it produces is elastic.
The is due to the technical economies of large scale production enjoyed by the firm. When an industry expands, the increase in the demand for factors like labour, capital, equipment, raw materials, power, etc. Therefore, we can draw a learning curve as we did in Fig. Food can easily be shipped from thousands of milesaway to a grocery store near you, enabling you to get anything youwant no matter the cost. Transport and marketing difficulties also emerge. Moreover, a firm earns losses when average cost is more than average revenue. This results from the internal economies, from better utilisation of existing plant, labour, etc.