Economics for SSC in English Medium.3.pdf

Economics for SSC in English Medium.3.pdf - total cost by...

This preview shows 1 out of 2 pages.

K KUNDAN total cost by the number of units produced. Suppose the total cost of production of 25 chairs is ` 2,500. In this case, cost per chair or Average cost = produced units of . No Cost Total = 25 2500 = ` 100 AC can also be measured by adding AFC and AVC, i.e., AC = AFC + AVC Average Fixed Cost (AFC) Average Fixed Cost is per unit fixed cost. It is Total Fixed Cost divided by output. AFC = Q TFC (Here, AFC = Average Fixed Cost; TFC = Total Fixed Cost; Q = Quantity of output.) Since fixed cost is constant, the greater the output, the lower will be the fixed cost per unit of output. Average Variable Cost (AVC) Average Variable Cost is per unit variable cost. It is total variable cost divided by output. That is, Q TVC AVC ? (Here, AVC = Average Variable Cost; TVC = Total Variable Cost; Q = Quantity of output.) Why is AC curve U-shaped? AC curve is a U-shaped curve due to operation of law of returns . As output is increased, AC first falls, reaches its minimum and then rises. The minimum point of AC curve indicates the lowest per unit cost of production. This point of output is also the point of optimum capacity of a firm. Marginal Cost (MC): Marginal cost is the addition to the total cost when an additional (extra) unit of a commodity is produced or when the output is increased by one unit. In economics, marginal means additional — whether it is used in the context of cost or revenue or product or even utility. Thus, MC is the additional cost of producing an additional unit of a commodity. It is attributable to the addition of one more unit to the output. Continuing the above example, suppose it costs ` 2,500 to manufacture 25 chairs and ` 2,620 to manufacture 26 chairs. In this case, MC will be ` 120 (= 2620 - 2500), which is the addition to the total cost ( ` 2,500) when an additional unit (26th chair) is produced. Again, remember, since MC is the additional cost, it is in fact an addition to the variable cost and not to the fixed cost because the latter (FC) remains the same in the short period. Why is MC curve U-shaped? The given figure depicts the behaviour of MC graphically. The MC curve is also U- shaped, which indicates that MC falls in the beginning, then remains constant and ultimately rises. The reason is the operation of the law of returns . Initially, the production is subject to the law of increasing returns (i.e., decreasing cost), then to the law of constant returns (i.e., constant cost) and ultimately to the law of diminishing returns (i.e., increasing cost). Once we understand why MC curve is U-shaped, it follows that AVC and ATC curves are also U-shaped. Moreover, MC curve cuts AVC and ATC curves at their minimum points. Area under MC curve = TVC Average Cost and Marginal Cost The average cost is found by dividing the total cost by the number of units produced. But the marginal cost means the addition made to the total cost in producing an extra quantity.
Image of page 1

Subscribe to view the full document.

Image of page 2
You've reached the end of this preview.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern