Lecture notes for Business

Economics (BUS-704) - 5

- Dr. Mirza Azizul Islam

ANALYSIS OF COST (CH-7)
Output Fixed Variable Total Marginal AC
cost cost cost cost

0 55 0 55

1 55 30 85 30 85

2 55 55 110 25 55

… … … … … …

6 55 225 280 170 46

 Fixed cost (FC) – overhead or sunk cost – Factory, Furniture
etc.
 Variable cost (VC) – vary with output changes – labour, raw
materials
 Total cost (TC) = FC + VC

 Marginal cost (MC) = additional cost for producing an extra

unit of output – sometimes can be quite low e.g. aircraft with
empty capacity
 = TCqi – TCq(i-1)

 Average or unit cost = Total cost/Output = TC/Q

MINIMUM AVERAGE COST AND
RELATIONSHIP BETWEEN MC AND AC
 If MC is below AC, it means that the last unit costs less than
the average of previous units and therefore, AC including
the last unit must be less than the previous AC (excluding
the last unit i.e. AC must be falling – May be restated as
when AC is falling, MC must remain below AC
 Reverse i.e. If MC greater than AC – AC rising

 MC = AC when AC neither falling, nor rising i.e. at the

bottom of AC.
Output Fixed Variable Total Marginal AC
cost cost cost cost

0 55 0 55
1 55 30 85 30 85
2 55 55 110 25 55
3 55 75 130 20 43
4 55 105 160 30 40
5 55 155 210 50 42
6 55 225 280 70 46