PRODUCTION COST

PRIYANKA ANKURANKITABRIJGAURAVARSHPREET

FIXED

COST

VARIABLE

COST

TOTAL

COST

OUTPUT

COST

VARIABLE COST

TOTAL COST

FIXED COST

AVERAGE COSTS• Average costs can be determined by dividing the firm’s costs

by the quantity of output it produces. • The average cost is the cost of each typical unit of product.

• Average Fixed Costs (AFC)• Average Variable Costs (AVC)• Average Total Costs (ATC)• ATC = AFC + AVC

Fixed costQuantity

FCAFCQ

Variable costQuantity

VCAVCQ

Total costQuantity

TCATCQ

FORMULAE & GRAPH

MARGINAL COSTDefinition- The change in Total cost by producing one more or one less unit of output .The addition to Total Cost due to the addition of one unit of output

Expression-

MC=Marginal Cost; TC=Total Cost of n units of output; TCn-1=Total Cost of n-1 units of output; TC=Change in Total Cost; Q=Change in Quantity

MC=TCn -TCn-1

Example: Total Cost =Rs 56 for 8 units then if 9 units are produced then Total Cost=72 then MC of 9th unit will be (Rs 72 - Rs 56)=Rs 16

Output (UNITS)

Fixed Cost( RS)

Variable Cost (Rs)

Total Cost(Rs)

Marginal Cost(Rs)

0 10 0 10 -

1 10 10 20 10

2 10 18 28 8

3 10 24 34 6

4 10 28 38 4

5 10 32 42 4

6 10 38 48 6

7 10 46 56 8

8 10 62 72 16

0 1 2 3 4 5 6 7 8 90

2

4

6

8

10

12

14

16

18

MARGINAL COST

MARGINAL COST

OUTPUT

Relation Between Total Cost And Marginal Cost

Marginal Cost is estimated as a difference between total cost of two successive unit of output. Thus, MCn = TCn – TCn-1 OR MC = Change in TC Change in Q

When TC rises at a diminishing rate, the MC declines.

When the rate of increase in TC stops diminishing, the MC is at its minimum .

When the rate of increase in TC starts rising, the MC is increasing.

RELATIONSHIPTCACM

C TC

MC

AC

Both AC and MC are derived from TC.AC = TC/QMC = TCn – TCn-1

Where AC is lowest, MC=AC .

AC decreases with the increase in output and MC relates to the cost of one more or one less unit produced .

Initially TC = MC , then as TC increases, MC and AC starts decreasing .

In later stage , AC increases but @ decreasing rate; MC of producing extra unit goes on decreasing.

This leads to optimum utilization of resources.

Cost

Output