Cost Curve

Cost Curve and production unit costs

cost curve is the relationship between the unit cost. of an output or product and the volume produced. The cost curve will normally exhibit a declining slope due to economies of scale and can also exhibit different shapes due to resource requirements or input costs to increase capacity and production. Cost curves are widely used in many industries but are of greater importance in industries that produce commodity or commoditized products in large quantities. Industries such as these can include Mining and quarrying, oil and gas, continuous production of non-differentiated products such wallboard, some plastic sheeting, paper and related products.

As an operations and business manager knowing where your cost curve for your products/outputs sit in relation to the competition is valuable knowledge in understanding your cost position and profitability in different market scenarios and the susceptibility of the business to new entrants or projects. Cost curve analysis is part of the strategic planning process in conjunction with the operations department. Positioning of your operation’s cost curve in relation to competitors can be due to several factors including:

-Access to low cost or higher grade raw materials
-Access or ownership of Key infrastructure
-Access or ownership of proprietary knowledge, hardware, software or patents
-Use of technology in production or extraction processes
-Age and type of machinery used in operations
-Access to financial and human capital

Among other advantages and characteristics the items above can affect the cost curve of your operations and where it is positioned in relation to other competitors.

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