Cost Of Production and Concept of Revenue — Economics STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceEconomicsCost Of Production and Concept of Revenue3 Marks
Question
Show the relationship between average cost and marginal cost in short.
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Answer
Average cost :
Average cost can be obtained by dividing the total cost of production by the units of production, $AC$ curve is seen with $U$ shape.
Marginal cost :
When one more unit is added to units of production on reduced from the units of production.
The change in cost of production is called marginal cost $MC$ curve is seen with hockey type.
Relationship between Average Cost and Marginal Cost :
Following relations are seen between average cost and marginal cost.
In the beginning, the law of increasing return operates average cost and marginal cost both are decreases with increase in production.
But marginal cost $(MC)$ falls faster than average cost $(AC)$. And $AC$ curve is seen upper side and $MC$ curve is seen at down side. It means that $MC < AC.$
After the optimum level of production the law of decreasing return applies and average cost and marginal cost both are increase.
But the increase in marginal cost is much faster, so the $MC$ curve is seen at upward side and $AC$ curve is seen at downward side.
It means that $MC AC.$
When the marginal cost falls and rises again, it cuts across the $AC$ curve.
At this point average cost is minimum. Therefore, when average cost is minimum. $AC$ and $MC$ are equal.
It means that $MC = AC.$
In production, when the law of constant return operates, at all stages of production, average cost and marginal cost are equal.
Both curves are the same and parallel to horizontal line.
From the point $MC$ rises and where it crosses $AC$, marginal cost increases but average cost decreases.
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