Topics: Economics, Average cost, Microeconomics Pages: 17 (5262 words) Published: August 22, 2013
Economic Assignment | Sajanpreet kaur Brar.|

atmc| micro economics|


Answer 1.) Cost Curves
a.) The Marginal Cost (MC) - The increase in the cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output. Additional cost associated with producing one more unit of output.

Marginal cost curve - A curve that graphically represents the relation between the marginal cost incurred by a firm in the short-run product of a good or service and the quantity of output produced.

Diagram: Marginal cost curve.

* The MC curve is generally increasing. This is due to the decreasing marginal productivity of  labour. (Referred from econ downloaded on 14th May 2013). b.) The Average Cost (AC) - The average cost is the total cost divided by the number of units produced. Average cost curve – The graphical representation of average cost. Diagram: Average cost curve.

The AC curve is U-shaped. This is because the ATC is made up of AVC, which is increasing, and AFC, which are decreasing. At low production quantities the decline in AFC dominates, but eventually the increasing AVC overwhelms the average costs.

c.)The Average Fixed Cost (AFC) - A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost. Average fixed cost curve - A curve that graphically represents the relation between average fixed cost incurred by a firm in the short-run product of a good or service and the quantity produced. Diagram: Average Fixed Cost Curve:

* AFC curve is always declining with quantity. This is because the same amount of fixed costs is being averaged over a growing quantity of output, leading to a decline in the curve. * (Referred by web.pedia http:// downloaded on 14th May 2013). d). The Average Variable Cost (AVC) - A cost that change with the change in volume of activity of an organization. Average variable cost (AVC) is an economics term that refers to a firm's variable costs (labour, electricity, etc.) divided by the quantity (Q) of output produced. Variable costs are those costs which vary with output.

Diagram: Average variable cost curve:

* The AVC is decreasing when it is above the MC curve and increasing when it is below the MC curve. This is because AVC is essentially the average of the marginal costs of each unit of output. This will lead to an increasing or a U-shaped AVC curve.(Referred by downloaded on 14th May). Answer 2.) Relationship between the law of diminishing returns and the concept of economies of scale: * Law of diminishing returns.

The tendency for a continuing application of effort or skill toward a particular project or goal to decline in effectiveness after a certain level of result has been achieved. The law of diminishing returns say that each time we do something to receive a benefit, the benefit will be less and less. (Reference – Michale W.Newell, Marina N, Grashina : The Project Management).

* Features.
The main features of this law are as follows:-
1.) Only one variable input is varied and all others are held constant. 2.) No change in technique of production.
3.) Variable proportions production functions. It means more of a variable factor can be used with the constant input of the fixed factors. 4.) All units of variable factor are homogeneous.

Bibliography: * Arleen J. Hoag, John H. Hoag(2006), Business and Economics, pg.122 (London: World Scientific Publishing Co. Ltd.)
* S.A.Siddiqui (2006), Managerial Economics and Financial Analysis, pg
* Roger A. Arnold,(2005,08) Economics, 8th ed. (USA: Thomson Learning, Inc. 2008.
* Frank Machovec, (2003), Perfect Competition and Transformation of Economics, (New York: Taylor& Francis e-Library, 2003).
* Albon, R. (1988) ‘The welfare costs of the Australian telecommunications pricing structure’, Economic Record, 64, 102–12.
* Boyco, M., Shleifer, A
* Commonwealth of Australia (1991) Industry Commission: Annual report 1990–91, AGPS, Canberra.
* Commonwealth of Australia (1992) Industry Commission: Annual report 1991–92, AGPS, Canberra
* Dixit, A (1997) ‘Power of incentives in private versus public organizations’, American Economic Review, 87, 378–82).
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