Question

Explain the following:

Cost curves under perfect competition.

Answer 1

Under perfect competition, the main cost curves are:

1. Total Cost (TC): Total expense incurred in production.
   TC = Total fixed cost + Total variable cost
2. Average Cost (AC):  Cost per unit of output.
   `AC = (TC)/"Quantity"`
3. Marginal Cost (MC): Additional cost of producing one more unit.
   `MC = (DeltaTC)/(Delta "Quantity")`
4. Average Fixed Cost (AFC): Fixed cost per unit. Falls as output increases.
   `AFC = (TFC)/"Quantity"`
5. Average Variable Cost (AVC): Variable cost per unit of output.
   `AVC = (TVC)/"Quantity"`

Shape of Curves:

• MC, AC, and AVC are U-shaped due to the Law of Variable Proportions.
• MC intersects AC and AVC at their minimum points.