Lecture 21 - 21 Theory of Cost 1 Recap from last Session...

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1 21 : Theory of Cost
Prof. Trupti Mishra, School of Management, IIT Bombay Recap from last Session Production cost Types of Cost: Accounting/Economic Analysis Cost Output Relationship Short run cost Analysis
Session Outline Prof. Trupti Mishra, School of Management, IIT Bombay The Long-Run Cost-Output Relations Break-Even Analysis: Linear Cost and Revenue Functions. Break-Even Analysis: Non-Linear Cost and Revenue Function
Prof. Trupti Mishra, School of Management, IIT Bombay long-run cost output relations imply the relationship between the changing scale of a firm and the firm’s total output , whereas in the short-run, this relationship is essentially one between the total output and the variable costs such as, labour and raw materials long-run is a period for which all inputs change or become variable .
Prof. Trupti Mishra, School of Management, IIT Bombay The long-run cost curve (LTC) is composed of a series of short-run cost curves. Assumes that the firm has only one plant, with the corresponding short-run cost curve given by STC1, Suppose the firm decides to add two more plants with associated two more short-run cost curves given by STC2 and STC3.
Prof. Trupti Mishra, School of Management, IIT Bombay The long-run total cost curve ( LTC) is then drawn through the minimum of the short-run cost curves, STC1,STC2, and STC3. The Long-Run Average Cost Curve (LAC) is derived by combining the short-run average cost curves (SACs)