Page 196 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-9: Theory of Cost and Revenue

4. MC (Short-term marginal cost curve): The marginal cost curve is also U-shaped. This means, it first Notes
decreases, reaches minimum at point A, and then increases upward. This leads to decreasing average
cost curve (AVC) curve, and the average cost (AC) curve is crossed at their lowest point. When AVC,
and AC are falling, the MC curve is at their bottom, and when they increase the MC curve is above
them.

9.11 Relationship between Cost Curves and Productivity Curves
Cost curve and the productivity curve are in opposite relationship. Curve with respect to cost and
productivity can be explained with the help of Fig. 9.11.
In figure 9.11 OX axis represents productivity. In
figure 9.11 (A) OY axis shows costs whereas OY You must understand the cost and productivity are
represents production. Fig. 9.11 (A) of the MP curve opposite to each other. The AC and MC respectively:
is marginal productivity curve, and the average AP and MP is the opposite.
productivity curve is AP curve. In Fig. 9.11 (B) MC
curve is the marginal cost curve and AC curve is the average cost curve.
From Figs. 9.11 (A) and 9.11 (B) the following points become clear–
(1) While increasing the MC, MP is falling, but when MP is falling, MC is increasing. When MP is
maximum (at point A), the MC is minimal (at point C).
(2) Increasing the AP, AC is falling. But when the AC is increasing AP is falling. When the AP is maximum
(point B), the AC is minimal (at point D).
(3) MP curve cuts AP curve at its highest point ‘B’ and shrinks faster than AP. MC curve cuts AC curve
at its lowest point (D) and grows faster than AC.

Fig. 9.11

Y Y
Productivity Curves Cost Curves

MC
Productivity A B Cost (`) D AC

C
AP
O MP X O X
Output Output
(A) (B)

9.12 Costs in Long Run
Long is the period of time in which the instrument is subject to change. Firm has enough time to use
all the tools needed to produce at minimum cost. In other words, longer the period of another aspect
of the firm is planning to produce at minimum cost. Firms can make long-term plans for the future,
and various methods of short-term can be choosen from, the production method which they adopt in
the long run. In the long-term in a way, all methods are available, of which the firm may choose. In

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