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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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