A firm is producing 20 units. At this level of output, ATC and AVC are respectively equal to Rs40 and Rs 37. Find out TFC of his firm. in simple steps
Answers
Answer:
The average fixed cost is the total fixed cost divided by the number of units produced. Hence, if TFC is the total fixed cost and Q is the number of units produced, then
AFC=TFCQ
Therefore, AFC is the fixed cost per unit of output.
Example: The TFC of a firm is Rs. 2,000. If the output is 100 units, the average fixed cost is,
AFC=TFCQ=2000100=Rs.20
If the output is increased to 200 units, then
AFC=TFCQ=2000200=Rs.10
Since TFC is constant, any increase in output decreases the AFC. Note that, while the AFC can become really small, it is never zero.
2. Average Variable Cost (AVC)
The second aspect of short-run average costs is an average variable cost. Average variable cost is the total variable cost divided by the number of units produced. Hence, if TVC is the total fixed cost and Q is the number of units produced, then
$$AVC =\frac {TVC}{Q}$$
Therefore, AVC is the variable cost per unit of output.
Usually, the AVC falls as the output increases from zero to normal capacity output. Beyond the normal capacity, the AVC rises steeply due to the operation of diminishing returns.
3. Average Total Cost (ATC)
The average total cost is the sum of the average variable cost and the average fixed costs. That is,
ATC = AFC + AVC
In other words, it is the total cost divided by the number of units produced.
The diagram below shows the AFC, AVC, ATC, and Marginal Costs (MC) curves:
short run average costs
It is important to note that the behaviour of the ATC curve depends upon that of the AVC and AFC curves. Observe that:
In the beginning, both AVC and AFC curves fall. Hence, the ATC curve falls as well.
Next, the AVC curve starts rising, but the AFC curve is still falling. Hence, the ATC curve continues to fall. This is because, during this phase, the fall in the AFC curve is greater than the rise in the AVC curve.
As the output rises further, the AVC curve rises sharply. This offsets the fall in the AFC curve. Hence, the ATC curve falls initially and then rises.
Marginal Cost (MC)
Another concept to learn in short-run average costs is Marginal Cost. Marginal cost is the addition made to the cost of production by producing an additional unit of the output. In simpler words, it is the total cost of producing t units instead of t-1 units. Let’s look at an example to understand this better:
A firm produces 5 units at a total cost of Rs. 200. For some reasons, it is required to produce 6 units instead of 5 and the total cost is Rs. 250. Therefore, the marginal cost is Rs. 250 – Rs. 200 = Rs. 50.
A note about marginal costs: It is independent of fixed costs. This is because fixed costs do not change with the output. On the other hand, in the short run, the variable costs change with the output. Hence, marginal costs are due to changes in variable costs. Therefore,
MC=ΔTCΔQ
… where ΔTC is the change in the total cost and ΔQ is the change in the output. This equation can also be written as:
MCn = TCn – TCn-1
In the Fig. 1 above, you can see that the MC curve falls as the output increases in the beginning and starts rising after a certain level of the output. This is because of the influence of the law of variable proportions. Since the marginal product rises first, reaches a maximum and then declines, the marginal costs decline first, reaches its minimum and then rises.
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Answer:
The average fixed cost is the total fixed cost divided by the number of units produced. Hence, if TFC is the total fixed cost and Q is the number of units produced, then
AFC=TFCQ
Therefore, AFC is the fixed cost per unit of output.
Example: The TFC of a firm is Rs. 2,000. If the output is 100 units, the average fixed cost is,
AFC=TFCQ=2000100=Rs.20
If the output is increased to 200 units, then
AFC=TFCQ=2000200=Rs.10
Since TFC is constant, any increase in output decreases the AFC. Note that, while the AFC can become really small, it is never zero.
2. Average Variable Cost (AVC)
The second aspect of short-run average costs is an average variable cost. Average variable cost is the total variable cost divided by the number of units produced. Hence, if TVC is the total fixed cost and Q is the number of units produced, then
$$AVC =\frac {TVC}{Q}$$
Therefore, AVC is the variable cost per unit of output.
Usually, the AVC falls as the output increases from zero to normal capacity output. Beyond the normal capacity, the AVC rises steeply due to the operation of diminishing returns.
3. Average Total Cost (ATC)
The average total cost is the sum of the average variable cost and the average fixed costs. That is,
ATC = AFC + AVC
In other words, it is the total cost divided by the number of units produced.
The diagram below shows the AFC, AVC, ATC, and Marginal Costs (MC) curves:
short run average costs
It is important to note that the behaviour of the ATC curve depends upon that of the AVC and AFC curves. Observe that:
In the beginning, both AVC and AFC curves fall. Hence, the ATC curve falls as well.
Next, the AVC curve starts rising, but the AFC curve is still falling. Hence, the ATC curve continues to fall. This is because, during this phase, the fall in the AFC curve is greater than the rise in the AVC curve.
As the output rises further, the AVC curve rises sharply. This offsets the fall in the AFC curve. Hence, the ATC curve falls initially and then rises.
Marginal Cost (MC)
Another concept to learn in short-run average costs is Marginal Cost. Marginal cost is the addition made to the cost of production by producing an additional unit of the output. In simpler words, it is the total cost of producing t units instead of t-1 units. Let’s look at an example to understand this better:
A firm produces 5 units at a total cost of Rs. 200. For some reasons, it is required to produce 6 units instead of 5 and the total cost is Rs. 250. Therefore, the marginal cost is Rs. 250 – Rs. 200 = Rs. 50.
A note about marginal costs: It is independent of fixed costs. This is because fixed costs do not change with the output. On the other hand, in the short run, the variable costs change with the output. Hence, marginal costs are due to changes in variable costs. Therefore,
MC=ΔTCΔQ
… where ΔTC is the change in the total cost and ΔQ is the change in the output. This equation can also be written as:
MCn = TCn – TCn-1
In the Fig. 1 above, you can see that the MC curve falls as the output increases in the beginning and starts rising after a certain level of the output. This is because of the influence of the law of variable proportions. Since the marginal product rises first, reaches a maximum and then declines, the marginal costs decline first, reaches its minimum and then rises
Answer is rs.60
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