Question

Show total cost, marginal cost and average cost with the help of diagrams.

Hint:

Understanding the relationship between total cost, marginal cost, and average cost helps firms optimize their production and minimize costs.

Answer 1

In economics, total cost (TC), marginal cost (MC), and average cost (AC) are key concepts used to understand a firm's cost structure. Below is an explanation of these costs and the diagrams that represent them.

Step 1: Total Cost (TC).
Total cost refers to the total expense incurred by a firm in producing a given level of output. It is the sum of total fixed costs (TFC) and total variable costs (TVC). The formula is: \[ TC = TFC + TVC \]

Step 2: Marginal Cost (MC).
Marginal cost is the change in total cost that results from producing one more unit of output. It is the derivative of total cost with respect to output. The formula is: \[ MC = \frac{\Delta TC}{\Delta Q} \] where \( \Delta TC \) is the change in total cost and \( \Delta Q \) is the change in output.

Step 3: Average Cost (AC).
Average cost is the total cost divided by the quantity of output produced. It is the cost per unit of output. The formula is: \[ AC = \frac{TC}{Q} \] where \( Q \) is the quantity of output produced.

Step 4: Diagrams.
The following diagrams show the relationships between total cost, marginal cost, and average cost: 1. Total Cost Curve: The total cost curve is typically U-shaped. It rises as output increases, reflecting increasing variable costs, and initially decreases as fixed costs are spread over a larger output.
2. Marginal Cost Curve: The marginal cost curve intersects the average cost curve at its lowest point. It initially decreases, then increases due to the law of diminishing returns.
3. Average Cost Curve: The average cost curve is U-shaped, initially declining as the firm increases output, and then rising as production becomes less efficient.