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NOTES OF CONCEPT OF COST
Cost- It refers to the expenditure incurred by afactor and non factor inputs for a given amount of output of a
commodity
...
Implicit Cost The cost of self owned or self employed resources
...
TC= TFC+ TVC or TC=AC*Q
Total Variable cost- It is the expenditure incurred on variable factor is known as Total variable cost
...
TFC= TC-TVC or
TFC=AFC*Q
Difference between Fixed cost and Variable cost
Fixed Cost
Variable cost
a) The expenditure incurred on fixed
a) The expenditure incurred on variable
factors are termed as fixed cost
factors is known as variable factors
...
So, it remains
output
...
c) It exist even when the production is c) It does not exist when the production is
zero
zero
Reasoning based question
Q1
...
TFC can never be zero and TC is a mixture of TVC and TFC
...
Why TFC remains parallel to OX-axis?
Ans
...
Q3
...
TC remains parallel to TVC because what ever changes comes in TC that is due to TVC
...
Why TVC increases at a decreasing rate in the initial stages of production?
Ans
...
It is a situation when MP
tends to rise
...
Rising MP means falling cost
...
Why the curve of TC and TVC are identical?
Ans
...
Average Fixed Cost- It is the total fixed cost per unit of output
...
AVC=TVC/Q
Average Cost- It is the total cost per unit of output is known as a Average Cost
AC= TC/ Q
Marginal cost- It is the additional cost due to additional production of a unit is known as marginal cost
MC= TCn - TCn-1 OR
MC= TVCn - TVCn-1
Facts about the curves of AFC, AVC, AC
a) AFC always slopes downward because TFC remains constant
...
As output is increased initially AC falls due to
operation of law of increasing returns, reaches its minimum and then rises due to diminishing returns
...
d) AC and AVC never intersect each other because AFC can
never be zero
...
Relationship between AC &MC
A) The MC curve will intercept the AC curves at its minimum point
...
When AC is increasing, MC lies above AC - because when MC is
above AC, producing an extra unit of output will raise average
Costs
...
i
...
MC=TCn-TCn-1
Relationship between AC and AVC
a) When AVC is falling , MC is less than AVC or AVC falls
only when MC
constant or minimum when MC=AVC
c) When AVC is rising, MC is more than AVC or AVC rises
when MC>AVC
...
i
...
MC=TCn-TCn-1