Question

1.Please, give the definitions of Total Cost (TC), Total Variable Cost (TVC), Total Fixed Cost (TFC), and Marginal Cost (MC). What is the “diminishing marginal utility” and “diminishing marginal returns? Explain each concept separately to see the difference between them. If you wish, you may give examples in order to empower your answer.

Answer 1

Total cost is the sum of all the costs involved in the production. There are two types of explicit costs that are variable costs and fixed costs. Total cost = total fixed cost + total variable cost

Total variable cost is the sum of all those costs that change with the production of a good i.e they are dependent on the output level and usually increase with output. Eg: wages of labor, cost of raw materials

Total fixed cost is the cost which is not dependent on the output and has to be paid irrespective of the number of units produced i.e it has to be paid even if there is 0 production. Eg: rent of a factory

Marginal cost is the additional cost incurred to produce one additional unit of output. Thus marginal cost of the nth unit = total cost of n units - total cost of (n-1) units

Diminishing marginal utility refers to the fact that as more and more units of a good are consumed, the marginal utility derived from each additional unit keeps on decreasing.

Diminishing marginal returns means that as more and more units of a factor of production are employed, the marginal product of the additional unit keeps on decreasing.