Question

Discuss the short-run cost curves with suitable diagram.

Answer 1

1. Total fixed cost: TFC 
   All payments for the fixed factors of production are known as total fixed costs. It does not change with output.
2. Total variable cost: TVC All payments to the variable factors of production is called a total variable cost. As output increases, TVC also increases.
3. Total cost curves: TC
   Total cost means the sum total of all payments made in the production. It is the total cost of production.
   TC = TFC + TVC.
4. Average fixed cost: AFC
   It refers to the fixed cost per unit of output.
   AFC = `"TFC"/"Q"`
5. Average variable cost: AVC
   It refers to the total variable cost per unit of output.
   AVC = `"TFC"/"Q"`
6. Average cost:
   It refers to the total cost per unit of output.
   AC = `"TC"/"Q"` (OR) AC = AFC + AVC

Q (in unit)	TFC (in ₹)	TVC (in ₹)	TC (in ₹) TFC +TVC	ATC (TC/Q) (in ₹)	AFC (in ₹)	AVC (in ₹)	ATC (AFC +AVC) (in ₹)
0	1000	0	1000	1000 /0= ∞	0	0	0 + 0 = 0
1	1000	200	1200	1200 /1= 1200	1000	200	1000+200 =1200
2	1000	300	1300	1300 /2= 650	500	150	500 + 150= 650
3	1000	400	1400	1400 /3= 466	333	133	333 + 133= 466
4	1000	600	1600	1600 /4= 400	250	150	250 + 150= 400
5	1000	900	1900	1900 /5= 380	200	180	200 + 180= 380

Average Total Cost or Average Cost

1. ATC curve is also a ‘U’ shaped curve.
2. Initially, ATC declines, reaches a minimum, and rises beyond the optimum output.
3. The ‘U’ shape of the AC reflects the law of the variable proportions.

• Marginal Cost:
  Marginal cost is the addition made to the total cost by producer one extra unit of output