cost part 2-converted (1)-converted.pdfbhjca

cost part 2-converted (1)-converted.pdfbhjca

1. Part2
Concept ofCost
AverageCost

2. Average Fixed Cost(AFC)
•1. The per unit cost incurred on fixed factorsof
production is known as average fixedcost.
•

3. Average fixedcost
•AFC falls as output increases becauseAFC
3.The shape of AFC curve is a rectangular hyperbola as area under AFC
curve (i.e. total fixed cost) remains same at different levels ofoutput.

5. Schedule ofAFC
output Total FixedCost Average FixedCost
0 10 infinity
1 10 10
2 10 5
3 10 3.3
4 10 2.5

6. Average Variable Cost(AVC)
•1. The per unit cost incurred on variable factors of production is knownas
AVC.
2. Average Variable Cost is U-shaped because of Law ofVariable
Proportion.
(a) As we know the shape of AVC depends upon the shape of TVC.Initially,
TVC increases at diminishing rate (because Total Product Increasesat
increasing Rate), that makes the AVC tofall.

7. AVC
•(b) Thereafter, TVC increases at increasing
rate(because Total Product Increases at
diminishing Rate), that makes the average
variable cost torise.
•
(c) So, from inverse S-shape, TVC curve, we
derive the U shape AVC curve. It can also be
explained with the help of the following
schedule anddiagram.

8. ScheduleAVC
Output TVC AVC
0 0
1 8 6.5
2 13 5.3
3 16 5

9. Average TotalCost
•In economics, average total cost (ATC) equals total fixedand
variable costs divided by total unitsproduced.
•Average total cost curve is typically U-shaped i.e. it decreases, bottomsout
and thenrises.
•A firm's total cost is the sum of its variable costs and fixedcosts.

10. ATC andAVC

11. ATC
output AFC AVC ATC
0
1 10 8 18
2 5 6.5 11.5
3 3.33 5.33 8.66
4 2.5 5 7.5

12. U Shape Averagecost
•The average cost curve is u-shaped because costs reduce as youincrease
the output, up to a certain optimalpoint.
•From there, the costs begin rising as you increase the output....
•Average cost is defined as the total costs (fixed costs + variable costs)
divided by totaloutput.

13. MarginalCost
•In economics, marginal
cost is the change in the
total cost that arises
when the quantity
produced is
incremented by one
unit; that is, it is the cost
of producing.

14. Area under Marginal
CostCurve
•Area under MC curve = TVC.
We have seen that MC isaddition
to the total variable cost whenan
additional unit is produced.This
means thattotal
variable cost (TVC) is the sum
of marginal costs because total
fixed costs remain the same in
shortperiod.

15. Quiz
•1. TVC= TC-________
•2.AC=AFC+___________
•3.______/Q-AVC=AFC
•4.TC/Q-TFC/Q=__________
•5. _______ curve starts fromorigin.
•6. When MC>ATC then ATC will__________.
•7. AVC can fall even when MC is rising providedMC <___________.
•8._________cost will be Zero when output isZero.

16. Quiz
•9. Which of the following cost curves is never ‘U’shaped?
•(a)
•(b)
•(c)
•(d)
Average cost curve
Marginal cost curve
Total cost curve
Fixed costcurve
•10.If total cost at 10 units is Rs 600 and Rs 640 for 11th unit. The marginal cost of 11
th unitis:
•(a)
•(b)
•(c)
•(d)
Rs20
Rs30
Rs40
Rs50
•11.Economic costexcludes:
•(a)
•(b)
•(c)
•(d)
Accounting cost + explicit cost
Accounting cost + implicit cost
Explicit cost + Implicit cost
Accounting cost + opportunitycost

17. Assignment
•1. Why does average cost fixed cost fall as the outputrises?
•2. State the reasons behind U shaped nature of Average Variable Cost
curve.
•3. Why is average total cost greater than average variablecost?
•4. Does AC fall only when MCfalls?
•5. A farmer invests his own saving in doing farming but hires to do
work. Identify implicitcost.
•6. Define marginal cost. Why does marginal cost eventually increase
as total productincreases

18. Assignment
•7. What are the two main differences between the short-run and
long-run? Whydoesdiminishingmarginal product exist in the short-
run, but not the longrun?
•8. Do ATC and AVC curves intersects each other? Givereasons.
•9. TVC is the summation of MCs. Explain through adiagram.
•10. Normal profits is a part of total cost.Comment.