EORUPA SCIENCE & COMMERECE ACADEMY

Economics Notes
Q. No. 15: Answer: Analyze the family of cost curves under short run?

COST OF PRODUCTION: Cost of production is the sum of all such expenses which a producer has to bear for producing a commodity or commodities. Costs are usually measured in money form. It includes expenditures in the form of wages, rent, interest, raw material, fuel, transportation, etc. COST FUNCTION: C = f(Q) Cost function expresses that cost of a product depends upon quantity produced. Short Run: Short run is a time period in which a firm can change its variable factors only. It cannot change fixed factors of production such as plant, machinery, and rent of land and building, salaries of permanent staff, interest on capital. Classification Cost of Production:
Cost of production is classified in the following terms. 1: Fixed cost 2: Variable cost 3: Total cost 4: Average fixed cost 5: Average variable cost. 6: Average total cost 7: Marginal cost 1: Fixed Cost (F. C): The expenditures which a firm has to bear on fixed factors is called fixed cost. It does not change in short run. It includes interest, depreciation, salaries of permanent staff, rent, etc. 2: Variable Cost (V. C): The expenditures which a firm has to bear against variable factors is called variable cost. It varies with the level of output. It includes cost of raw material, wages of contract labour, advertisement expenditures, insurance and taxes, transportation, etc. 3: Total Cost (T. C): Total cost is the sum of fixed coast and variable cost. It can be calculated as: TC = FC + VC 4: Average Fixed Cost (AFC): It is the fixed cost per unit of output. Average fixed cost can be calculated as: FC AFC = Q Where FC = Fixed Cost Q = Output 5: Average Variable Cost (AVC): It is the variable cost per unit of output. Average variable cost can be calculated as: VC AFC = Q Where VC = Variable Cost Q = Output Composed & Designed By: Basit butt

EORUPA SCIENCE & COMMERECE ACADEMY

Economics Notes
6: Average Total Cost (ATC): It is the cost per unit of output. Average cost can be calculated as: TC AC = A(TC ) = Q Where TC = Total Cost Q = Output OR AC = AFC + AVC

7: Marginal Cost (M. C): Marginal cost is the cost of production of an additional units of output. OR Marginal cost is the change in total cost due to unit change in output. MC can be calculated as: TC MC = Q Where TC = Change in TC Change in level of output Q = SCHEDULE: The schedule is as follows: Q 0 1 2 3 4 5 6 F. C 30 30 30 30 30 30 30 V. C 0 12 20 25 35 55 100 TC=FC+V C 30 42 50 55 65 85 130 AFC --/1 = 30 30 /2 = 15 30 /3 = 10 30 /4 = 7.5 30 /5 = 6 30 /6 = 5
30 12

AVC --/1 = 12 20 /2 = 10 25 /3 = 8.4 35 /4 = 8.8 55 /5 = 11 100 /6 = 16.7

42

AC --/1 = 42 50 /2 = 25 55 /3 = 18.4 65 /4 = 16.3 85 /5 = 17 130 /6 = 21.6

MC --12 8 5 10 20 45

Diagram:
140 120 100

y-axis TC

FC 80 VC TC 60
40 20 0 1 2 3 4 5 6

VC

FC

Output (Q)

x-axis

Explanation: In this diagram, output is measured along x-axis while TC, VC and FC have been taken on y-axis. FC is the curve of fixed cost. It is parallel to x-axis. VC is the curve of variable cost VC Varies with the volume of output. As level of output increases, the curve of variable cost also increase. When level of output is zero, variable cost is also zero. This is the reason that the curve of variable cost is starting from origin. TC is the curve of total cost. TC is the sum of FC and VC. Total cost never be zero, therefore it starts from 30. Composed & Designed By: Basit butt

EORUPA SCIENCE & COMMERECE ACADEMY

Economics Notes
DIAGRAM:
50 45 40 35 30 25 20 15 10 5 0 1 2 3 4 5

y-axis

MC

AFC AVC ATC MC

AC AVC

AFC
6

x-axis

Output (Q)

Explanation: In the above diagram, output is measured along x-axis while AFC, AVC, ATC and MC have been taken on y-axis. The curve of AFC is falling with the increase in level of output. AVC curve falls upto 3rd unit of output then it starts rising. AVC remains below than AC curve. Findings from the Diagrams: Following are the findings from the above diagram. 1: When AC falls, MC also falls but MC is falling faster than AC. Therefore MC curves lower than AC curve. 2: When AC is minimum, MC curve intersects, AC curve. Therefore at minimum of AC, MC and AC are equal. 3: When AC increases, MC also increases but MC is increasing faster than AC. Therefore MC curve is above than the AC curve. 4: When AVC is falling, MC is also falling but MC is falling faster than AVC. This is the reason that MC curve is lower than AVC curve. 5: When AVC is minimum MC curve intersects AVC curve. Therefore at minimum point of AVC, MC and AVC are equal. 6: When AVC increases, MC also increases but MC is increasing faster than AVC. This is the reason other MC curve is above than the AVC curve.

Composed & Designed By: Basit butt