Question

Consider the relationship among total ,average and marginal cots ,by using facts and figures

Answer 1

Total cost - both fixed and variable costs -  is the cost incurred by the producer . Fixed cost does not depend on the level of output produced. He will incur fixed cost even when the production is zero. On the other hand, variable cost depends on the level of output. If the output is zero, variable cost is zero. Variable cost increases as the level of ourput increases.

Average cost is the share of total cost per unit of ourput. Average cost = Total cost/ Quantity.
For example, if total cost is $5000, and output is 100 units, then average cost = 5000/ 100 = $50. As level of output increases, average cost can increase, remain the same or decrease, depending on the productivity of the factors of production.

Marginal cost is the cost of producing an additional unit of output. Marginal cost = (Total cost of n - total cost of n-1)/ (Quantity at n - quantity at n-1). For example, if total cost of producing 100 units is $5000, and the firm incurs a total cost of $5060 on the 101st unit, then marginal cost = $60. ((5060 - 5000) / (101 - 100) =60/1 = 60)

Relationship between marginal cost and average cost:  

When the average cost decreases with the increase in the level of output, the marginal cost is less than the average cost.

When the average cost increases with the increase in the level of output, the marginal cost is more than the average cost.

When the average cost remains the same with the increase in the level of output, the marginal cost is equal to the average cost.

This can be illustrated with a graph:

  

The point X, where Marginal cost curve intersects Average cost curve is where marginal cost = average cost. On the left side of X, average cost is decreasing. So, marginal cost is lower than average cost. On the righ side of X, average cost is increasing. So, marginal cost is higher than the average cost. But at point X, they intersect. That is where  marginal cost is equal to average cost.

If we multiply average cost by quantity at a particular level of output, we get total cost. For example, if output = 100, average cost = $50, then total cost = 100*50 = $5000.

The following table summarizes the three costs:

Q	TC	AC	MC
0	20	-	-
1	32	32	12
2	42	21	10
3	47	15.67	5
4	53	13.25	6
5	61	12.2	8
6	71	11.83	10
7	86	12.29	15