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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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