Short Run Cost Curves : Marginal Cost Curve : Cost and Revenue Analysis – Economics Notes Class 11 – 12

 Short Run Cost Curve:  Marginal Cost Curve

   Marginal Cost :

·       
Marginal cost is the addition to total cost as
one more unit of output is produced.

·       
Marginal cost is the addition to total cost of
producing  ‘n’ units instead of  (n -1 ) units.

MCn 
= TCn  – TC(n -1 )

·       
Marginal cost is the change in total cost as a
result of change in output by one unit,

MC = ∆TC / ∆Q

   Where ∆TC = change
in total cost

    ∆Q = change in quantity of output

 

     Marginal Cost Curve :

•         Marginal cost is independent of fixed cost,
  since marginal cost is an addition to total cost when one additional unit of
  output is produced.
•       Marginal cost is associated with Total Variable
  Cost and Total Cost. Thus, marginal cost curve derived from TVC curve is the
  same as derived from TC curve. Therefore MC curve is common both to AVC curve
  and ATC curve. 
•       MC curve cuts ATC and AVC curves at their minimum points.
•      MC curve is  ‘U’ – shaped, as the output increases MU curve slopes downward reaches to minimum and then starts sloping upward beyond OQ level. 
•     The U – shape of MC curve is because it follows directly the law of variable proportions. 
•      Its negative slope is due to increasing returns to the variable factor and its positive slope due to decreasing returns to the variable factors.
•     TVC can be calculated as the sum total of MC of various units of output

   1.  Both Average Cost (AC)  and Marginal Cost (MC)  curves are ‘U’ – shaped, reflecting the Law of Variable Proportions.

  2. When AC falls with increase in output, MC is lower than AC, i.e. MC curve lies below the AC curve.

  3. When AC rises with increase in output, MC is higher than AC, i.e. MC curve lies above the AC curve.

  4. When AC is neither falling nor rising, then MC equals AC   (MC = AC). Here, AC is minimum and constant and it lies at the level of optimum output.

  5. MC curve curs AC curve (AVC and ATC curves both)  at its minimum point.

  6. At zero level of output both AC and MC are indeterminate.

Relation Between Marginal Cost and Average Variable    Cost :

  1. Both AVC and MC curves are ‘U’ shaped reflecting the Law of Variable Proportions.

 2. When AVC is falling, MC curve is below AVC curve.

 3. When AVC  is rising, MC curve  is above AVC curve.

 4. When AVC is neither falling nor rising then MC = AVC.

 5. The minimum point of AVC curve will always occur to the right of the minimum point of MC curve.

  Relation Between Total Cost (TC)  curve and Marginal Cost (MC)  curve:

 1. Marginal cost is addition to total cost when one more unit of output is produced. MC is calculated as 

MCn = TCn – TC (n-1) 

 2. When TC rises at a diminishing rate, MC declines.

 3. When the rate of increase in TC stops diminishing, MC is at its minimum point.

 4. When the rate of increase in total cost (TC)  starts rising (at increasing rate) , MC is increasing.

Some Important Questions about Cost: 

Question : Why is short – run average cost curve (SAC)  ‘U’ shaped?

 Answer:  

•     The short run AC curve os ‘U’ shaped as it falls with the increase in the output up to its minimum point ‘M’ and then it rises with the increase in output.

•     This behaviour of AC curve is due to the reason that  it follows directly the Law of Variable Proportions.

•      The negative sloping (downward slope)  of the AC curve is due  to the increasing returns to the variable factor because of fuller utilisation of fixed factor, specialisation and division of labour.

•     At the higher level of output the positive sloping (upward slope)  of AC curve is due to decreasing returns to the variable factor because of overcrowding and difficulty in management.

  Question : What is the shape of TVC curve and why ?

 Answer:  

•     The shape of TVC curve is inverted ‘S’ – shaped. 

•     The TVC curve is concave downward showing an increase with diminishing rate and then it is concave upward showing an increase with increasing rate. 

•    This behaviour is because it follows directly the Law of Variable Proportions.

•     At initial level the total variable cost (TVC)  increases at a diminishing rate due to increasing returns to the variable inputs because of fuller utilisation of fixed factors and specialisation and division of labour.

•  At higher level of output, the total variable cost (TVC) increases at an increasing rate due to decreasing returns to the variable factor because of overcrowding and difficulty in management.