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Production and cost — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsProduction and cost4 Marks
Question
Distinguish between (i) Fixed cost and variable cost giving examples and (ii) Average cost and marginal cost giving an example.
✓

Answer

Variable cost:A variable cost is a company's cost that is associated with the amount of goods or services it produces. A company's variable cost increases and decreases with the production volume. For example, suppose company ABC produces ceramic mugs for a cost of $2 a mug. If the company produces 500 units, its variable cost will be $1,000. However, if the company does not produce any units, it will not have any variable cost for producing the mugs.
Fixed cost:
A fixed cost does not vary with the volume of production. A fixed cost does not change with the amount of goods or services a company produces. It remains the same even if no goods or services are produced. Using the same example above, suppose company ABC has a fixed cost of $10,000 per month for the machine it uses to produce mugs. If the company does not produce any mugs for the month, it would still have to pay $10,000 for the cost of renting the machine. On the other hand, if it produces 1 million mugs, its fixed cost remains the same. The variable costs change from zero to $2 million in this example.
Average cost:
Average Total Cost is the sum of average variable cost and average fixed cost. or we can say, average cost is equal to the total cost divided by the number of units produced.
Marginal cost:
Marginal Cost is the addition made to the total cost by producing 1 additional unit of output.
Suppose, there is a firm and it’s cost and production values can be seen from the following table.
Quantity of output Total cost MC=TCn-TCn-1 AC=TC/Q
0 20 20 -
1 30 10 30
2 38 8 19
3 45 7 15
4 50 5 12.5
5 57 7 11.4
6 68 11 11.3
7 80 12 11.45
8 96 16 12
9 114 18 12.7
10 135 21 13.5

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