Relationship between production function cost curves

Short-Run Costs and Production (With Diagram)

There is a close relation between production and cost in the short-run since one is a on the production function for three and four units of labour, which can produce, of Diminishing Return and the shape of the short run average cost curve. The production function determines the shape of a firm's cost curves. Diminishing marginal return to labor: If a firm keeps increasing an input, holding all other. Our first task is to explore the nature of the production function. .. Next we illustrate the relationship between Acme's total product curve and its total costs.

This curve is constructed to capture the relation between marginal cost and the level of output, holding other variables, like technology and resource prices, constant.

What is the relationship between production function and total cost curve? | Yahoo Answers

The marginal cost curve is usually U-shaped. Marginal cost is relatively high at small quantities of output; then as production increases, marginal cost declines, reaches a minimum value, then rises.

The marginal cost is shown in relation to marginal revenue MRthe incremental amount of sales revenue that an additional unit of the product or service will bring to the firm. This shape of the marginal cost curve is directly attributable to increasing, then decreasing marginal returns and the law of diminishing marginal returns.

Thus marginal cost initially falls, reaches a minimum value and then increases.

Long run average total cost curve relating to economies and diseconomies of scale

When the marginal cost curve is above an average cost curve the average curve is rising. When the marginal costs curve is below an average curve the average curve is falling. This relation holds regardless of whether the marginal curve is rising or falling. Stated otherwise, LRMC is the minimum increase in total cost associated with an increase of one unit of output when all inputs are variable. The long-run marginal cost curve tends to be flatter than its short-run counterpart due to increased input flexibility as to cost minimization.

The long-run marginal cost curve intersects the long-run average cost curve at the minimum point of the latter. Long-run marginal cost equals short run marginal-cost at the least-long-run-average-cost level of production.

Graphing cost curves together[ edit ] Cost curves in perfect competition compared to marginal revenue Cost curves can be combined to provide information about firms. In this diagram for example, firms are assumed to be in a perfectly competitive market.

In a perfectly competitive market the price that firms are faced with would be the price at which the marginal cost curve cuts the average cost curve. Cost curves and production functions[ edit ] Assuming that factor prices are constant, the production function determines all cost functions.

In this case, with perfect competition in the output market the long-run market equilibrium will involve all firms operating at the minimum point of their long-run average cost curves i.

If, however, the firm is not a perfect competitor in the input markets, then the above conclusions are modified. The average products of some inputs may be increasing while that of others are falling. The same logic dictates that a similar situation holds for the relation between marginal product and marginal cost in the case of several variable factors. Eventually, declining marginal products will surely cause marginal cost to rise. We may now generalize the relations in the case of several variable factors.

Let us suppose that there are n variable factors. We may write the quantities of these inputs used as X1 ,X2, X3, ….

Production and costs

Xn and their respective prices as w1, w2, w3, …. Again, the diminishing average products of the variable factors must, after a point, cause AVC to rise.

In a like manner, marginal cost can be expressed as: As in the case of AVC, the diminishing marginal products of the variable factors must, after a certain stage of the production process, cause marginal cost to rise. The manager of a restaurant which is open from 6. Thus, the marginal revenue from remaining open all night is expected to be Rs. Since the marginal revenue exceeds the marginal cost by Rs. Hence, the restaurant has to be opened the additional eight hours.

Thus it is clear that, in making the decision, the manager considers only marginal cost. Fixed cost is not considered at all.

• Cost curve
• What is the relationship between production function and total cost curve?
• Short-Run Costs and Production (With Diagram)

Thus, the total cost of remaining open the additional time is found to be Rs. Therefore, the decision would be to keep the restaurant closed at night.

But we have noted that staying open adds Rs.