Question

why are firms better able to predict their costs of production than the price of their product? why is it possible for average cost to be decreasing while marginal cost is increasing ?

answer with your own word ( 200 words )

Answer 1

Cost of production is quite predictable because, firms, when produce goods are aware of the raw material, capital and amount of labour needed for it. The cost of producing anything includes fixed cost and variable costs both are predictable and known as the producer knows what's going to go inside his produce in approximate quantities. Whereas, the price of the goods are not predictable as it depends on the demand of the good. If the demand for produced good is high then producer can set higher prices and can leave scope of profit as well accordingly but if the demand for the good is not high and is rather less then producers will set lower prices in order to motivate consumers to purchase that. Therefore, as prices variates according to the demand they are not predictable.

Average cost is always decreasing because average cost is total cost / total output, as output increases the AC keeps on decreasing. Whereas, marginal cost in the cost of producing one extra unit of output . when producer wants to produce one extra unit of output they usually increase labour whereas the other factors of production remains constant, therefore labour end up producing lesser product then they should considering their cost. This is law of diminishing marginal returns and hence, MC keeps on increasing after a certain point.