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Unit 8: Cost Analysis
Hence, marginal cost is the addition to the total variable costs when output is increased from Notes
n-1 units to n units of output. It follows, therefore, that the marginal cost is independent of the
amount of fixed costs.
In Table 8.1, MC is the slope of the TC curve. As TC curve first rises at a decreasing rate and later
on at an increasing rate, MC curve will also, therefore, first decline and then rise.
Table 8.1: The Relationship between MC, AC and TC
Advantage of TC: break-even analysis profit of firm
Advantage of AC: calculating per unit profit of a firm
Advantage of MC: to decide whether a firm needs to expand or not
!
Caution The properties of the average costs (AVC, AFC, ATC) and marginal costs
can briefly be described as follows:
1. AFC declines continuously, approaching both axes asymptotically.
2. AVC first declines, reaches a minimum and rises thereafter. When AVC attains
minimum, MC equals AVC.
3. As AFC approaches asymptotically the horizontal axis, AVC approaches ATC
asymptotically.
4. ATC first declines, reaches a minimum and rises thereafter. When ATC attains its
minimum, MC equals ATC.
5. MC first declines, reaches a minimum and rises thereafter — MC equals AVC and
ATC when these curves attain their minimum values. Furthermore, MC lies below
both AVC and ATC when they are declining; it lies above them when they are
rising.
The laws governing costs are the same as the laws governing productivity. When output is
increased in the short run, it can only be done by increasing the variable input. But as more and
more of a variable input is added to a fixed input, the law of diminishing marginal productivity
enters in. Marginal and average productivities fall.
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