Average cost is a ratio of Total Cost to Total Output units produced.
Since total cost has fixed and variable costs as two components, we have three types of
These are average fixed cost, average variable cost and average tot
AR-MR Relationship table:
This has been illustrated in the table below.
The table makes the MR-AR relationship clear. In part I where total quantity increases
from 10 to 20 to 30 marginal quantity remains constant at 10 (20 10 = 10, 30 - 20 = 10).
The relation between Average and Marginal Revenue is similar to that of the behavior of
average and marginal quantities in general, such as costs, wages etc.
When the marginal quantity is constant, average quantity is also constant and
The analytical outcome of a competitive market is derived from the six
characteristics of competition.
Thus, analytically, there are three attributes of competition.
1. Price Uniformity
2. Horizontal Demand Curve
3. Normal Profits
A useful distinction is also made between physical capital and human capital.
Just as investment is made in physical goods to enhance their productive capacity similar
investment can be made in human beings to promote their efficiency.
Over the past few d
A Firms objective:
Production and sale of goods is a commercial activity
It is a profit motivated activity or behavior.
A firm will produce a particular quantity of output and will sell it at a particular price
which will help maximize profit.
Profit is t
A Firms Demand Curve:
Let us begin with the simple case of a competitive market.
There is competition both in the labor market and the product market.
Price of the product is assumed to be $5.
The firm has to determine its demand under the following produ
A firm: Profit
A firm may be a producer, seller, trader, exporter or a financier.
In any one of these capacities, firms show similar basic tendencies. In order to maximize
its profits a firm has to maintain as large a difference between what it spends on
Equilibrium and Profits:
When the product is differentiated an individual firm has some capacity to influence
It can exert a degree of control over price and output sold.
Equilibrium of a firm has been explained in Figure 50.
In the fig
When one behaves economically he has to make a choice and decide his preference while
spending his limited resources.
The satisfaction of wants is an objective of economic activity.
A person with a limited income of $10 may have multiple
Downward Sloping Curve D:
In case of a competitive firm, price is given and fixed.
Demand or Average Revenue curve is perfectly flexible and is a horizontal straight line.
A monopolist has the freedom to charge a higher or lower price.
With a change in th
The implication of the DMU principle will be clear with the help of a numerical example.
The example helps to bring out the basic principle underlying the law.
Four columns need to be drawn which should include the following information:
I. Total stoc
Discounting is an opposite process.
The interest rate enhances the present value of the principal in the future course of time.
On the other hand, the discounting method reduces future incomes or values at a certain
rate to determine their wor
Demand for Inputs:
Firms produce output and bring it to the market.
The whole activity is carried out with the intention of earning profits.
In order to achieve this, firms have to maximize their returns or revenue and minimize
their cost of production.
Demand and supply schedules in the capital market together determine the rate of
In Figure 57 DD is the downward sloping demand curve for loanable funds.
The supply curve of loanable funds SS is upward sloping showing an increased savings
Consumers Surplus under demand curve:
It can also be explained as the area under the demand curve. This can be illustrated as:
units MU Price
6 (Total CS)
In the exampl
Consumers Surplus intra-marginal units are more valuable:
This arises from the fact that though the consumer equates utility (the marginal units)
with the price, the intra-marginal units are more valuable (a subjective valuation), in
terms of utility enjo
Marshall has analyzed consumers surplus as a part of demand behavior.
Such a surplus of utility that a consumer enjoys is a result of the law of diminishing
While utility that a consumer experiences from every addition
Concept of a Firm
A firm is the smallest unit of production or sale.
Microeconomic theory is an equilibrium analysis.
It is concerned with the behavior of demand and supply forces.
Marshall is reported to have said that demand and supply are like two blad
Compounding of interest charges:
As the number of years of the borrowing period increase the compounded interest goes
In general, for n number of years, the mathematical formula used for compounding
purposes is as follows:
V = K(l + r)n [V
MR = MC rule:
Equilibrium of a firm is a condition where profits are maximized.
The analytical condition of equilibrium is stated as a point of equality between Marginal
Revenue and Marginal Cost.
It ensures the profit as
Since products are differentiated under monopolistic competition, the demand curve for a
The price of an individual firm may be higher and its sales larger.
All this calls for stiff reaction on the part of other rival
Certain legal provisions & public utilities
In modern times certain legal provisions create monopoly rights.
These are in the form of copyright norms, patent norms, standardization, etc. leading to
= Finally there are monopolies in the for
Causes of ATC behavior:
ATC passes through three stages.
Initially it falls, then it reaches a minimum and is nearly constant; finally it starts
The explanation of such behavior of the ATC runs is as in the case of the laws of variable
Cartel is a monopoly organization.
Equilibrium under Cartel and monopoly is identical in nature.
Cartel equilibrium has been represented in Figure 48.
Average and marginal cost curves are similar to that of the monopolist. Similarly av
Meaning and Importance:
Capital is the second important factor of production.
Whereas labor is a human agent, capital is a material agent of production.
Capital is, however, a controversial factor.
This is because capital is composed of a l
Capital is also a means of production.
There are a variety of produced goods such as sugar, milk, cloth, steel, electricity etc.
which may not all be capital goods.
All produced goods together constitute wealth.
Total wealth can be used only in one of the
Capital is a valuable agent of production.
It tremendously enhances productive capacity.
For instance, a fisherman, who can catch 10 fish per day with his own hands, can collect
50 or more fish with the use of a net.
The use of a net thu
C1Q1 = F1Q1 + V1Q1
The lowest point on ATC is C2. Around this point ATC remains constant for a
moment. To the left of C2 ATC falls (C1C2) and to its right ATC rises (C2C3).
ATC thus shows the three stages of cost behavior, namely, the Diminishing, the
Borrowing and lending
Borrowing and lending are capital transactions.
Savings or bank credits are supplied as loanable funds.
Borrowers pay the extra charges of interest or discount for the use of loanable funds.
Therefore the rate of interest is the pric