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
Explain the concept of Average Fixed Cost.
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Answer
By dividing fixed cost by the units of output, average fixed cost, can be obtained.
Average fixed cost is per unit fixed cost.
To find out average fixed cost, the following equation is used.
Equation :
Fixed Cost and Average
Fixed Cost :
In short term production, fixed cost does not change therefore fixed cost line is parallel to axis.
While average fixed cost shows the tendency of continuous decline.
As units of production output increase, fixed cost is distributed among more and more units and so average fixed cost decline and therefore, its line has a negative slope.
Average fixed cost $(AFC)$ is seen with negative slope and very near to horizontal axis but never touch it because $AFC$ never become zero.
Explanation through figure and schedule :
As per above schedule at $60 \ Z$ fixed cost , by increasing units of production, the average fixed cost $(AFC)$ showing decreasing trend, which can be presented in the figure. In the given figure, on $OX$ axis Units of production and on $OY$ axis average fixed cost is given.
$AFC$ is decrease because of increasing production.
Which shows by point $a, b, c, d$ and $e.$
By joining these points we obtained.
Average Fixed Cost Curve.
$AFC$ curve seen from left side to right side, from upward to downward with negative slope.
Explain the concept of Average Variable Cost with figure.
By dividing total variable cost by units of production we get average variable cost $(AVC)$.
Average variable cost is a per unit variable cost.
The concept of average variable cost is very useful in taking decision regarding production.
It is helpful in taking decision regarding increase in production, decrease in production or to stop the production.
Suppose the total variable cost of $10$ commodities of $x$ is $Rs. 200.$ Then
Average Variable Cost $(AVC) =\frac{200}{10} = Rs. 20$
The total variable cost increases with increase of production and if production stop it becomes zero.
Therefore, Total Variable Cost $(TVC)$ curve is with positive slope from origin.
The average variable cost has a tendency of declining in the beginning and after optimum level, it has tendency of increasing because the law of diminishing returns is operate.
It means that average variable cost has a relation with the units of production.
This matter can be presented by following figure and schedule.
Figure and Schedule :
In the above, figure, on $OX$ axis units of production and $OY$ axis average variable cost are given.
We can see from the schedule that total average cost increase with increase in units (proportion) of production.
But in starting increasing returns to scale operates and because of that average variable cost decreases.
Up to third unit $AVC$ decreases. After completing optimum level, decreasing returns to scale operates and AVC increases.
Therefore, in the beginning, decreasing return to scale operates and after optimum level it is increasing.
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