{"id":3824,"date":"2020-03-06T06:16:19","date_gmt":"2020-03-06T06:16:19","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3824"},"modified":"2020-03-06T06:16:19","modified_gmt":"2020-03-06T06:16:19","slug":"modern-theory-of-cost","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/modern-theory-of-cost\/","title":{"rendered":"MODERN THEORY OF COST"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_71 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/modern-theory-of-cost\/#MODERN_THEORY_OF_COST\" title=\"MODERN THEORY OF COST\">MODERN THEORY OF COST<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/modern-theory-of-cost\/#TYPES_OF_COSTS_AS_PER_MODERN_THEORY_OF_COST\" title=\"TYPES OF COSTS AS PER MODERN THEORY OF COST\">TYPES OF COSTS AS PER MODERN THEORY OF COST<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h1 class=\"has-text-align-center wp-block-heading\" id=\"modern-theory-of-cost\"><span class=\"ez-toc-section\" id=\"MODERN_THEORY_OF_COST\"><\/span><strong>MODERN THEORY OF COST<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h1>\n\n\n\n<p>Modern economists including <strong>Stigler, Andrews and Friedman<\/strong> have questioned the validity of U-shaped cost curves both theoretical as well as on empirical grounds. Also the long run costs in modern theory are not U- shaped but L- shaped.<\/p>\n\n\n\n<p>The Modern theory suggests the existence of \u2018built- in-\nreserve capacity \u2018which imparts flexibility and enables the plant to produce\nlarger output without adding to the costs. Built \u2013in- reserve capacity are\nplanned by firms. <\/p>\n\n\n\n<p>The short-run cost curve has a saucer- type shape whereas\nthe long-run Average cost curve is either L-Shaped or inverse J-shaped. <\/p>\n\n\n\n<p>The Modern theory of cost stresses on the role of economies of scale, which significantly enables the firm to continue production at the lowest point of average cost for a considerable period of time. The firm checks dis-economies of scale by planning in advance and enjoys the gains of production in comparison to the <a rel=\"noreferrer noopener\" aria-label=\"traditional theory (opens in a new tab)\" href=\"https:\/\/commerceiets.com\/traditional-theory-of-cost\/\" target=\"_blank\">traditional theory<\/a> where the average cost rises after the firm reaches the optimal level of output. <\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"types-of-costs-as-per-modern-theory-of-cost\"><span class=\"ez-toc-section\" id=\"TYPES_OF_COSTS_AS_PER_MODERN_THEORY_OF_COST\"><\/span><strong>TYPES OF COSTS AS PER <strong>MODERN THEORY OF COST<\/strong><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-15-1.png\" alt=\"\" class=\"wp-image-3825\"\/><figcaption><strong>MODERN THEORY OF COST<\/strong><\/figcaption><\/figure>\n\n\n\n<p class=\"has-text-align-center has-green-background-color has-background\"><strong>SHORT RUN COSTS<\/strong><\/p>\n\n\n\n<p><strong>AVERAGE FIXED COST<\/strong><\/p>\n\n\n\n<p>The fixed costs include the costs for:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The salaries and other expenses of administrative staff.<\/li><li>The wear and tear of machinery.<\/li><li>The expenses for maintenance of building.<\/li><li>The expenses for the maintenance of land on which the plant is installed or operates.<\/li><\/ul>\n\n\n\n<p>As in the traditional theory of cost, the average fixed costs in modern microeconomics, also plots as a rectangular hyperbola. This is shown as follows:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-16-1.png\" alt=\"\" class=\"wp-image-3826\"\/><figcaption><strong>MODERN THEORY OF COST<\/strong><\/figcaption><\/figure>\n\n\n\n<p><strong>AVERAGE VARIABLE COST<\/strong><\/p>\n\n\n\n<p>In modern theory, Average variable cost is not U shaped rather it is saucer shaped and has a flat stretch over a range of output. This flat stretch represents the \u2018built in reserve capacity\u2019 of the firm to meet seasonal and cyclical changes in the demand. The average variable cost curve is as follows:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-17-1.png\" alt=\"\" class=\"wp-image-3827\"\/><figcaption><strong>MODERN THEORY OF COST<\/strong><\/figcaption><\/figure>\n\n\n\n<p><strong>AVERAGE COST<\/strong><\/p>\n\n\n\n<p>The short-run Average costs consist of the Average fixed costs and Average variable costs. The short-run average variable cost curve at each level of output.&nbsp;The smooth and continuous fall in the average cost curve is due to the fact that the AFC curve is a rectangular hyperbola and the AVC curve first falls and then becomes horizontal within the range of reserve capacity. Beyond that it starts rising steeply. The curve of average cost is as follows:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-18-1.png\" alt=\"\" class=\"wp-image-3828\"\/><figcaption><strong>MODERN THEORY OF COST<\/strong><\/figcaption><\/figure>\n\n\n\n<p class=\"has-text-align-center has-green-background-color has-background\"><strong>LONG RUN COSTS<\/strong><\/p>\n\n\n\n<p><strong>LONG RUN AVERAGE COST<\/strong><\/p>\n\n\n\n<p>Modern economists divide long run costs into production costs and managerial costs\/ In the long run, all costs are variable and they given rise to a long run average cost curve which is roughly L- shaped. This curve rapidly slopes downwards in the beginning but later remains flat or slopes gently downwards at its right-hand cost. The long run average cost curve is as follows:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-19-1.png\" alt=\"\" class=\"wp-image-3829\"\/><\/figure>\n\n\n\n<p>The Long run average costs curve has two main features:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>It does not rise at every large scale of\noutput.<\/li><li>It does not envelope the Short run Average\nCost but intersects them.<\/li><\/ul>\n\n\n\n<p><strong>LONG RUN MARGINAL COST<\/strong><\/p>\n\n\n\n<p>According to modern theory, shape of long-run marginal cost curve corresponds to the shape of long-run average cost curve. The given figure shows that when LAC is L- shaped and LAC curve is falling then LMC curve will also be falling and its falling portion will be below the falling portion of LAC curve.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-20-1.png\" alt=\"\" class=\"wp-image-3830\"\/><\/figure>\n\n\n\n<p>  <\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/demand\/\">Theory of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-demand\/\">Law of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/demand-function\/\">Demand Function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/exceptions-of-law-of-demand\/\">Exceptions of law of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/elasticity-of-demand\/\">Elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/change-in-demand\/\">Change in demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/price-elasticity-of-demand\/\">Price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-law-of-demand-and-elasticity-of-demand\/\">Law of demand Vs Elasticity of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/factors-affecting-price-elasticity-of-demand\/\">Factors affecting price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/production-function\/\">Production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-short-run-long-run-production-function\/\">Short run vs long run production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-variable-proportions\/\">Law of variable proportions<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/types-of-demand\/\">Types of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/managerial-economics\/\">Managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/characteristics-of-managerial-economics\/\">Characteristics of managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-managerial-economics\/\">Scope of managerial economics<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/utility-analysis\/\">Utility analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/\">Law of diminishing marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-equi-marginal-utility\/\">Law of equi marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium\/\">Consumers Equilibrium<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/indifference-curve-analysis\/\">Indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium-using-indifference-curve-analysis\/\">Consumer equilibrium using indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-tp-ap-and-mp\/\">Relationship between TP, AP and MP<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-increasing-returns\/\">Law of increasing returns<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-returns\/\">Law of diminishing returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-constant-returns\/\">Law of constant returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/returns-to-scale\/\">Returns to Scale<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/economies-and-diseconomies-of-scale\/\">Economies and diseconomies of scale<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/concept-of-costs\/\">Concept of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-ac-and-mc\/\">Relationship between AC and MC<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/traditional-theory-of-cost\/\">Traditional theory of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/modern-theory-of-cost\/\">Modern theory of costs<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explicit-vs-implicit-costs\/\">Explicit vs Implicit costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/revenue\/\">Revenue<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-competition\/\">Perfect competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-meaning\/\">Monopoly<\/a>&nbsp;<\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/price-discrimination\/\">Price discrimination<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-perfect-competition-and-monopoly\/\">Difference between perfect competition and monopoly<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-and-monopolistic-competition\/\">Perfect Vs Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-and-monopolistic-competition\/\">Monopoly and monopolistic competition<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/product-differentiation-strategy\/\">Product differentiation strategy<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopolistic-competition\/\">Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/national-income-in-india\/\">National Income in India<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/measurement-of-national-income\/\">Measurement of national income in India<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/consumption-function\/\">Consumption function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/\">Keynes Psychological law of consumption<\/a><\/td><td><\/td><td><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"266\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg\" alt=\"MODERN THEORY OF COST\" class=\"wp-image-787\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg 1024w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-300x78.jpg 300w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-768x199.jpg 768w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1536x398.jpg 1536w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize.jpg 1920w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>MODERN THEORY OF COST<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>MODERN THEORY OF COST Modern economists including Stigler, Andrews and Friedman have questioned the validity of U-shaped cost curves both theoretical as well as on empirical grounds. Also the long run costs in modern theory are not U- shaped but L- shaped. The Modern theory suggests the existence of \u2018built- in- reserve capacity \u2018which imparts&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/modern-theory-of-cost\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;MODERN THEORY OF COST&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[113,92],"tags":[],"class_list":["post-3824","post","type-post","status-publish","format-standard","hentry","category-managerial-economics","category-micro-economics"],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3824","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=3824"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3824\/revisions"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=3824"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=3824"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=3824"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}