Question
Explain concept of $TC, AC$ and $MC.$
✓
Answer
Cost of production is an important factor in governing the supply of a product. Following are the three main types of costs :(A) Total Cost (TC): It is the total expenditure incurred by a fir m on the factors of production required for the production of goods and services. Total cost is the sum of Total Fixed Cost (TFC) and Total Variable Cost (TVC). Total Fixed Cost is the cost incurred on fixed factors of production like land, factory, building, capital, etc. These factors cannot be changed in the short period. They remain constant. Total Variable Cost is the cost incurred on variable factors such as raw – materials, labour, etc. These factors can be varied or changed according to the change in output level. So the variable cost varies. Total Cost = Total Fixed Cost + Total Variable Cost i.e., $TC = TFC + TVC$
TC increases as the level of output increases.
(B) Average Cost (AC) : Refers to per unit total cost of production. The average cost is obtained by dividing Total Cost of production by the number of units of that commodity produced
i.e. $A C=\frac{T C}{\text { Total Output }}$
Suppose the total cost of producing 100 units of commodity $X$ is $₹ 1000$. Then the average cost is
$ AC =\frac{ TC }{\text { Total Output }}=\frac{1000}{100}=10$
$\therefore AC =₹ 10 $
(C) Marginal Cost (MC) : It is net addition made to the total cost (TC) by producing one ( more unit of output.
Suppose the total cost of producing 2 units is ₹ 200 and TC of producing 3 unit is ₹ $240.$
$MC_n = TC_n – TC_{n-1} = ₹ 240 – ₹ 200 = ₹ 40$
Where,
$n =$ Number of unit produced ?
$MC_n =$ Marginal Cost of the nth unit ?
$TC_n =$ Total Cost of n unit
TC increases as the level of output increases.
(B) Average Cost (AC) : Refers to per unit total cost of production. The average cost is obtained by dividing Total Cost of production by the number of units of that commodity produced
i.e. $A C=\frac{T C}{\text { Total Output }}$
Suppose the total cost of producing 100 units of commodity $X$ is $₹ 1000$. Then the average cost is
$ AC =\frac{ TC }{\text { Total Output }}=\frac{1000}{100}=10$
$\therefore AC =₹ 10 $
(C) Marginal Cost (MC) : It is net addition made to the total cost (TC) by producing one ( more unit of output.
Suppose the total cost of producing 2 units is ₹ 200 and TC of producing 3 unit is ₹ $240.$
$MC_n = TC_n – TC_{n-1} = ₹ 240 – ₹ 200 = ₹ 40$
Where,
$n =$ Number of unit produced ?
$MC_n =$ Marginal Cost of the nth unit ?
$TC_n =$ Total Cost of n unit
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