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Ms S Chattopadhyay
PGT (Economics)
KV Ballygunge
CBSE Syllabus …
• Production
• Inputs of production
• Are the inputs freely available ?
Cost of Production
• Nature of TVC :
1. Changes directly with change in output.
2. TVC = 0 when Q = 0
• TVC curve is an upward sloping curve starting from
origin.
Total Cost
1 12 6 18
2 12 10 22
3 12 15 27
Output TVC TC
TFC
(units)
0 12 0 12
1 12 6 18
2 12 10 22
3 12 15 27
4 12 24 36
Relation : TC &TVC
• TC = TFC + TVC
TC – TVC = TFC
• TFC is not equal to zero & it remains constant.
Hence TC & TVC curves are parallel to each
other.
• Since TFC remain constant for all levels of
output , nature of TC depends exclusively on
the nature of TVC only
Application
• Complete the table :
• Q TC TFC TVC (= TC – TFC)
• 0 15 15 0
• 1 17 15 2
• 2 20 15 5
• 3 25 15 10
Note : At Q=0, TC = TFC
TFC remains constant
Average Variable Cost
0 0 -
1 6 6
2 10 5
3 15 5
4 24 6
5 35 7
6 48 8
Average Fixed Cost
0 12 0 00 0 00
1 12 6 12 6 18
2 12 10 6 5 11
3 12 15 4 5 9
4 12 24 3 6 9
5 12 35 2.4 7 9.4
6 12 48 2 8 10
Relation : AC & AVC
With increase in output, both AFC & AVC fall and hence AC
falls. After certain level first AVC reaches its minimum (Point
B) & rises and then AC reaches its minimum (A) & then rises.
The difference between AC & AVC is AFC and AFC falls with
increase in output . Hence the two curves comes closer but
never intersect each other as AFC is never equal to zero
• AFC = TFC / Q
• TFC is never equal to zero, hence AFC will also
be not equal to zero
Points to Remember
• TC = TFC + TVC
TVC = TC - TFC
• At Q= 0 , TVC = 0 & TC = TFC
• TFC remains constant
• AC = TC/Q OR AC = AFC + AVC
• AVC = TVC/Q
• AFC = TFC/ Q
Application: Complete the table
• Q TC TFC TVC AC AFC AVC
• 0 10 10 0 00
• 1 12 10 2 12
• 2 15 10 5 7.5
• 3 19 10 9 6.3
• Note : AC = TC/Q, At Q=0 , TFC=TC , TFC
remains constant , TVC = TC – TFC ,
• AFC= TFC/Q , AVC = TVC/Q
Marginal Cost
MC = ∆TC / ∆Q OR MC = ∆TVC / ∆Q
MU – MP - MC
• Marginal cost is change in total cost resulting from the
change in production of output by one unit.
• MC = ∆TC / ∆Q
• Marginal product is change in total product resulting
from the change in use of variable factor by one unit.
• MP = ∆TP / ∆L
• Marginal Utility is change in total utility resulting from
the change in consumption by one unit.
• MU = ∆TU / ∆C
• MARGINAL IS THE RATE OF CHANGE IN TOTAL
Other ways of calculating MC
• MC = Ch in TC / Ch in Q
• = 10/1 = 10
AC - MC Relation schedule
• Q TC AC = TC/Q MC = Ch in TC/Ch in Q Remarks
• 1 20 20 -- when MC < AC, AC falls
• 2 28 14 8
• 3 34 11.3 6
• 4 38 9.5 4
• 5 42 8.4 4 MC minimum
• 6 48 8 6
………………………………………………………………………………………………………….
• 7 56 8 8 MC = AC & AC mimimum
& Constant
• …………………………………………………………………………………………………....
• 8 66 8.25 10 MC > AC , AC rises
• 9 90 10 24
MC The Marginal Cost curve passes
through the minimum point of
AC
the AC curve.
MC (Marginal Cost)
It is also U-shaped. First it
decreases, reaches a minimum AC
and then increases. MC > AC
(Average Cost)
Minimum AC
MC min
0 q1 Q
AC – MC Relation
Relation : AC & MC
• AC = TC / Q , MC = TC / Q
AVC
MC < AVC, AVC falls
MC min
AFC
0 q1 Q
AC – AVC – MC : Relation
7 Cost Concepts (Short-run)