2. Cost
func-on
• The
cost-‐output
rela-onship
plays
an
important
role
in
determining
the
op-mum
level
of
produc-on.
TC
=
F(Q)
Where,
TC
=
Total
cost
Q
=
Quan-ty
produced
F
=
func-on
10/24/11
Prof.Prasad
Joshi
3. • The
cost
func-on
can
be
classified
as
:
(a)short-‐run
cost
func-on
and
(b)
long
run-‐cost
func-on.
10/24/11
Prof.Prasad
Joshi
4. • Short-‐run
is
defined
as
that
period
during
which
the
physical
capacity
of
the
firm
is
fixed,
and
during
which
output
can
be
increased
only
by
using
the
exis-ng
capacity
more
intensively.
• Long-‐run
is
a
period
during
which
it
is
possible
to
increase
the
firm's
capacity
or
to
reduce
it
in
size.
10/24/11
Prof.Prasad
Joshi
11. § When
a
firm
expands
its
size
&
goes
for
large
scale
produc-on,
it
stands
to
enjoy
certain
benefits.
Such
advantages
which
arise
due
to
large
scale
produc-on
are
known
as
economies
of
scale.
§ According
to
Marshal,
there
are
2
types
of
economies
of
scale.
They
are
§ Internal
Economies
of
Scale
§ External
Economies
Of
Scale
10/24/11
Prof.Prasad
Joshi
12. § Internal
economies
Of
scale:
IE
are
those
advantages
of
large-‐scale
produc-on
which
accrue
to
a
firm
on
account
of
its
superior
techniques
&
management.
Following
are
some
of
the
IE
of
scale.
§ Technical
Economies
§ Managerial
Economies
§ Marke;ng
Economies
§ Financial
Economies
§ Risk
bearing
Economies
of
scale
10/24/11
Prof.Prasad
Joshi
13. § External
economies
Of
scale:
when
a
par-cular
industry
grows
in
size
&
strength,
it
brings
many
advantages
to
all
the
firms
within
that
industry.
Those
advantages
which
are
available
to
all
the
firms
are
called
the
EE
of
scale.
Following
are
some
of
the
EE
of
scale.
§ Economies
of
Localisa;on
§ Economies
of
Informa;on
§ Economies
of
Specialisa;on
10/24/11
Prof.Prasad
Joshi
15. Diseconomies
refer
to
the
disadvantages
suffered
by
a
firm
when
it
expands
its
produc-on
beyond
the
stage
of
op-mum
combina-on
of
factors
or
beyond
the
level
of
op-mum
output.
Following
are
such
diseconomies
of
scale:
§ When
the
firm
expands
produc-on
beyond
certain
level.
It
develops
many
complexi-es.
Effec-ve
management
&
smooth
co-‐ordina-on
at
different
levels
become
difficult.
10/24/11
Prof.Prasad
Joshi
16. § Beyond
the
stage
of
op-mum
produc-on,
the
efficiency
of
machinery
&
equipment
declines.
This
is
called
the
technical
diseconomy
§ Beyond
certain
point,
the
firm
is
compelled
to
pay
higher
wages
to
recruit
labour.
Consump-on
of
raw
material
becomes
costlier.
It
faces
the
problem
of
shortage
of
fuel,
power,
finance
etc.
10/24/11
Prof.Prasad
Joshi
