traditional and modern theory of cost pdf

Traditional And Modern Theory Of Cost Pdf

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By a similar summing up, we can have the demand curve of all the industries using a particular productive service. The supply of labour will depend on the size and composition of population, its occupational and geographical distribution, labour efficiency, cost of education and training, cost of movement, the expected income, relative preference for work and leisure, and so on.

L-Shaped Long Run Average Cost Curve: Modern Cost Theory

A significant recent development in cost theory is that the long-run average cost curve is L- shaped rather than U-shaped. Even after a sufficiently large scale of output, the long-run average cost does not rise; it may either remain constant or it may even go on falling slightly. Empirical evidence indicates that initially the long-run average cost rapidly falls but after a point it remains flat throughout or at its right-hand end it may even slope gently downward. For example, Joel Dean in his cost function studies funds that long run average cost curve is L-shaped. Likewise, J.

modern theory of distribution

Traditional theory distinguishes between the short run and the long run. The short run is the period during which some factors is fixed; usually capital equipment and entrepreneurship are considered as fixed in the short run. The long run is the period over which all factors become variable. In the traditional theory of the firm total costs are split into two groups total fixed costs and total variable costs:. The fixed costs include:.

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Cost Theory: Introduction, Concepts, Theories and Elasticity | Economics

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Traditional and Modern Theory of Cost in Short Run and Long Run

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Theory of Costs

Supply along with demand determines price. We study some important concepts of costs, and traditional and modern theories of cost. Costs are very important in business decision-making. Cost of production provides the floor to pricing. It helps managers to take correct decisions, such as what price to quote, whether to place a particular order for inputs or not whether to abandon or add a product to the existing product line and so on. Ordinarily, costs refer to the money expenses incurred by a firm in the production process. But in economics, cost is used in a broader sense.

The concept of business cost is similar to actual cost. Normal profit is the necessary minimum earning which the firm must receive to remain in the present occupation. All the explicit cost like wages, rent, interest etc fall in this category. These are the cost that cannot be recovered. For eg. Amortization of past expenses like depreciation , expenditure on a highly specialized equipment designed to order for a plant that can neither be sold to any other firm nor can be used for any alternative purpose. Private cost and social cost.

Traditional theory distinguishes between the short run and the long run. The short run is the period during which some factors is fixed; usually capital equipment and entrepreneurship are considered as fixed in the short run. Total cost is the total expenditure incurred by a firm during the production process. Total cost will change with the change in the ratio of output to input. Such changes may be the result of the changes in the efficiency of conversion process or changes in the prices of inputs. Total cost is a positively sloped curve.


The theory of costs is better categorized under the traditional and modern theory of cost. The objectives of this TOPIC are to a. Define correctly the following.


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4 Comments

  1. Nothelmo S.

    In summary: the traditional theory of costs postulates that in the short run the cost curves (AVC, ATC and MC) is U-shaped, reflecting the law of variable proportions. Between these two phases of plant operation there is a single point at which unit costs are at a minimum.

    03.04.2021 at 12:15 Reply
  2. Riehalnaxi

    better categorized under the traditional and modern theory of cost. The objectives of this chapter are to. a. Define correctly the following concepts.

    07.04.2021 at 10:46 Reply
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