Cost-output relationship facilitates many managerial relationships such as
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Cost-output relationship plays an important role in determining the optimum level of production. Knowledge of the cost-output relation helps the manager in cost control, profit prediction, pricing, promotion etc. The relation between cost and its determinants is technically described as the cost function.
Proper understanding of the nature and behavior of costs is a must for regulation and control of cost of production. The cost of production depends on money forces and an understanding of the functional relationship of cost to various forces will help us to take various decisions. Output is an important factor, which influences the cost.
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Cost-Output Relationship in Short-Run - Cost concepts made use of in the cost behavior are Total cost, Average cost, and Marginal cost. Total cost is the actual money spent to produce a particular quantity of output. Total Cost is the summation of Fixed Costs and Variable Costs.
TC=TFC+TVC
Upto a certain level of production Total Fixed Cost i.e., the cost of plant, building, equipment etc, remains fixed. But the Total Variable Cost i.e., the cost of labor, raw materials etc., vary with the variation in output. Average cost is the total cost per unit. It can be found out as follows.
AC=TC/Q
Total of Average Fixed Cost (TFC/Q) keep coming down as the production is increased and Average Variable Cost (TVC/Q) will remain constant at any level of output.
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Cost-output Relationship in Long-Run – This is a period, during which all inputs are variable including the one, which are fixes in the short-run. In the long run a firm can change its output according to its demand. Over a long period, the size of the plant can be changed, unwanted buildings can be sold staff can be increased or reduced. The long run enables the firms to expand and scale of their operation by bringing or purchasing larger quantities of all the inputs. Thus in the long run all factors become variable.
Long-run cost-output relations therefore imply the relationship between the total cost and the total output. In the long-run cost-output relationship is influenced by the law of returns to scale. In the long run a firm has a number of alternatives in regards to the scale of operations. For each scale of production or plant size, the firm has an appropriate short-run average cost curves. The short-run average cost (SAC) curve applies to only one plant whereas the long-run average cost (LAC) curve takes in to consideration many plants.
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Answer:
The cost-output relationship is also influenced by external factors such as demand and competition.
Explanation:
From the above question,
They have given :
Cost-output relationship facilitates many managerial relationships :
This cost function is used to determine the relationship between cost and output.
The cost-output relationship can be expressed in terms of the marginal cost function.
The marginal cost function is used to calculate the total cost of producing one additional unit of output. The cost-output relationship is important because it helps to identify the optimal level of output, where the cost of production is minimized. It also helps to identify the point at which the cost of production starts to exceed the revenue earned from sales. In addition, it is helpful in forecasting the expected costs of production and in making decisions about pricing, promotion, and other cost-related activities.
It is a mathematical expression which shows the relation between the cost and any of its determinants. It helps in understanding how the cost changes with the changes in the determinants. The cost-output relation helps in determining the most profitable level of production. It also helps in understanding the behavior of cost at different output levels. The cost-output relation helps in taking various managerial decision such as pricing, promotion etc.
The relation also helps in budgeting, resource allocation and cost control.
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