Question
Distinguish between:
- Fixed Costs and Variable Costs.
- Average Cost and Marginal Cost.
| S.No. | Fixed Costs | Variable Costs |
| 1. | Fixed Cost are the costs which do not change with change in the level of output. | Variable costs are the costs which directly change with change in the level of output. |
| 2. | These costs remain even if the output is zero. | There are no variable costs at zero level of output. |
| 3. | Example: Rent for factory building, wages to permanent staff, interest on capital etc. | Example: Expenses on raw material used in production, wages to daily workers etc. |
| S.No. | Average Cost | Marginal Cost |
| 1. | Average cost is cost per unit of production. | Marginal cost is addition made to total cost when an additional unit of a commodity is produced. |
| 2. | It is calculated by dividing the total cost by number of units produced AC = Total Cost/No. of units produced. $\text{AC}=\frac{\text{TC}}{\text{Q}}$ | It is calculated by dividing the change in total variable cost by change in number of units produced. $\text{MC}=\frac{\Delta\text{TVC}}{\Delta\text{Q}}$ |
| 3. | $\text{AC} = \text{AFC} + \text{AVC}$ | $\text{MC}_\text{n}=\text{TVC}_\text{n}-\text{TVC}_{\text{n}-1}$ |
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| Rs. Crores |
| | Wages and salaries | 1000 |
| | Net current transfers to abroad | 20 |
| | Net factor income paid to abroad | 10 |
| | Profit | 400 |
| | National debt interest | 120 |
| | Social security contributions by employers | 100 |
| | Current transfers from government | 60 |
| | National income accruing to government | 150 |
| | Rent | 200 |
| | Interest | 300 |
| | Royalty | 50 |
| Output (units) | Average fixed cost (Rs.) | Marginal cost (Rs.) |
| 1 | 60 | 32 |
| 2 | 30 | 30 |
| 3 | 20 | 28 |
| 4 | 15 | 30 |
| 5 | 12 | 35 |
| 6 | 10 | 43 |
| S.No. | Rs.(in crores) | |
| 1 | Private final consumption expenditure. | 2,000 |
| 2 | Net capital formation. | 400 |
| 3 | Change in stock. | 50 |
| 4 | Compenstation of employees. | 1,900 |
| 5 | Rent. | 200 |
| 6 | Interest. | 150 |
| 7 | Operating surplus. | 720 |
| 8 | Net indirect tax. | 400 |
| 9 | Employers' contribution to social security schemes. | 100 |
| 10 | Net exports. | 20 |
| 11 | Net factors income from abroad. | -20 |
| 12 | Government final consumption expenditure. | 600 |
| 13 | Consumption of fixed capital. | 100 |
| Output(Units) | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Average Revenue (Rs.) | 7 | 7 | 7 | 7 | 7 | 7 | 7 |
| Total Cost (Rs.) | 7 | 15 | 22 | 28 | 33 | 40 | 48 |