Unit 1:Chapter 9: Fixed cost and variable cost

Compare THE CURVES OF MARGINAL COST AND AVERAGE COST

As the volume of production increases it gets the following: - The curve of the average cost decreases at first reaches its minimum point, and then starts increasing, due to the Law of diminishing returns. - The curve of the marginal cost decreases towards its minimum, then moves upward from there, and interests with the AC at its minimum point, and then continues its increase. -Before the intersection point the curve of the marginal cost is below the curve of the average cost (the marginal cost is less than the average cost). They are equal at the intersection point. After the intersection point, the curve of the marginal cost is above the curve of the average cost. -The average cost is decreasing when it is greater than the marginal cost, and increasing when it is less than the marginal cost.

What is a fixed cost?

Fixed costs are costs independent of the size of production. They remain constant and fixed whether or not anything is produced at all. Fixed costs include rent, depreciation, insurance and maintenance costs, administrative expenses, real estate tax, debt repayments, full timers salaries.

Interpret the table that shows the effect of increasing the quantity of production on the average fixed cost.

It is clear from the table that as the volume of production increases, the average fixed cost decreases, which provides it with an increase in its competitiveness. In economics, this phenomenon is called "increased returns."

If the TOTAL COST is represented in a graph how would it look?

Notice that the total cost increases slowly at first, because the firm is highly productive and competitive during the early stages of production (High productivity results in low costs). Later on, the competitiveness of the firm weakens, thereby slowing the increase in its productivity, and decreasing its revenues. This increases the firms costs. Therefore, the variable cost (and hence the total cost) tends to increase rapidly during later stages. Economists call this phenomenon the law of diminishing returns.

What is the importance of marginal cost?

The marginal cost tells us what quantity to produce in order to minimize costs as much as possible and maximize profit. If the marginal cost was higher than the market price, then every unit produced would constitute a loss for the firm. If the marginal cost was lower than the market price, this would indicate that the firm is making a profit below its maximum value. The firm can only attain the maximum profit by bringing costs to their minimum, which it can do by producing just the right quantity for the marginal cost to be equal to the market price.

What is the purpose of calculating the average cost and the marginal cost?

The purpose of calculating the average cost and the marginal cost is to know the development of the economic costs of the enterprise with each change in the volume of its production.

What is a marginal cost?

The term 'marginal' implies something on the margins or edges. Thus marginal cost is the cost of the last unit produced by the firm, or the cost of every additional unit.

What is a total cost?

The total cost consists of the fixed cost ( FC) and the variable cost (VC). In other terms, TC = FC + VC

Why is the curve declining?

This curve is declining, due to the following: -Increase in the Quantity produced-> Decrease in the Average Fixed Cost -Decrease in the Quantity produced->Increase in the Average Fixed Cost The AFC curve decreases as the quantity produced increases because the same cost is distributed on larger quantity. The firm must increase the quantity of its production in order to be able to reduce its average fixed cost and thus reduce the selling price of its goods, which increases the demand for its production and raises the volume of its sales.

What are the ways of calculating the average fixed and variable cost together?

Average cost = Average fixed cost + Average variable cost or Average cost = Total cost ÷ quantity produced

What kind of costs are there?

1-TOTAL COST 2-FIXED COST 3-VARIABLE COST 4-Average Cost 5-MARGINAL COST

What is the formula of Average Fixed Cost?

AFC=FC/Q It is the fixed cost per unit.

What is the formula of Average Variable Cost?

AVC= VC/ Q It is the variable cost per unit.

If the VARIABLE COST is represented in a graph how would it look?

As quantity produced increases, the variable cost increases. Variable cost is an increasing function, since the more quantity produced, the more raw material are needed, which leads to an increase in variable cost.

If the fixed cost is represented in a graph how would it look?

As seen in the figure and table, the FC remains fixed, and is represented by an horizontal line even though the quantity produced is increasing.

Interpret the graph that shows the effect of the quantity of production increasing on the average variable cost.

In the first stage, when Q increased from 10 to 40 units, AVC was decreasing; Q was increasing by (300%) more than the rate of increase of variable cost (110%). However, in the second stage, the opposite is true. Q was increasing by (40%) less than the rate of increasing of variable cost (86.7%), and this what made the AVC increase from 6 to 8 monetary units. As Q increase at a rate larger than the rate of increase of VC, the AVC decreases. As Q increase at a rate smaller than the rate of increase of VC, the AVC increases. The AVC curve reaches a minimum value at Q = 40 units.

What is the formula of marginal cost?

MC =Change in total cost (ΔTC)/Change in Quantity (ΔQ)

What is an Average Cost (AC)?

By definition, the average cost of production is the average cost of producing one unit of output. It is cost per unit.

What is a VARIABLE COST?

Variable cost changes with the quantity produced. As the quantity increases, these costs increase accordingly, and vice-versa. Examples of variable costs are raw materials, energy, transportation, and wages of part timers.