Page 192 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-9: Theory of Cost and Revenue

of resources is the growing proportion of the rule. Beginning with stable means of dynamic Notes
resources are used more efficiently. Consequently, the average cost goes down. Figure 9.7 is
known as a point of diminishing returns or cost of production. This proves stable means of
production is being optimally utilized. This situation persists to some extent on the production
and post production of a range Laws may return identical or similar costs, this situation seems
to be at point A. After point A full potential use of resources seems to be a constant change, to
use their resources more and tied proportion of resources is reduced. This in turn decreases the
efficiency of the instrument variable. Increasing rate decreases in the production and decreasing
production costs, increasing returns or the applicable law. Rising costs due to the rules applicable
after point A, the average cost rises.

9.7 Marginal Cost

To produce an additional unit of a commodity in which the difference between the total cost is called
the marginal cost. This can be explained by the following formula. Let the total cost be 135 of 5 objects
and for 6 objects, the total cost be 180. Therefore, the marginal cost of the sixth object can be calculated.
Marginal Cost = 180 – 135 = 45
Therefore, the marginal cost of the sixth unit will be 45.
According to Mc Connell, “Marginal cost may be defined as the additional cost of producing one
more unit of output”
—Mc Connell
According to Ferguson, “Marginal cost is the addition to total cost due to the addition of one unit of
output.”
—Ferguson
Change in cost divided by the change in production or n by n -1 of the total cost of the unit down the
total cost of the marginal unit cost can be determined. This can be explained by the following formula–
_____
MC = ∆TC = TC – TC n–1

∆Q
n
(Here MC = marginal cost, TC = n the total cost amount, ∆FC = 0
n
TC = n–1 the total cost amount, ∆TC = total cost The reason, according to the definition of the fixed
n–1
changes and ∆Q = change in volume of production.) cost does not change.
This should take care of the fixed cost (FC) does
____

not change with the change in output in the ∆FC is Marginal cost is the additional cost of the object is

∆Q
always equal to zero. The firm’s marginal cost does used to produce one more unit. Keep in mind the
not affect the fixed costs. Marginal impact on the cost additional cost may be the only variable cost.
of the total variable cost (VC). An estimate of the total
variable cost of (∆VC) producing the change in the amount divided by the (∆Q) change can be detected.
∆TC
∆VC
∆VC
____

MC = _____ = ∆FC + _____ = _____ , ∴ ∆FC/∆Q = 0

∆Q
∆Q
∆Q
∆Q
The concept of marginal cost can be understood with the help of Table 7 and Fig. 9.8:
Table 7: Marginal Cost
Units of Output Total Cost Marginal Cost
1 20 20 – 0 = 20
2 28 28 – 20 = 8
3 34 34 – 28 = 6
4 38 38 – 34 = 4
5 43 42 – 38 = 4
6 48 48 – 42 = 6
7 56 56 – 48 = 8
8 72 72 – 56 = 16
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