# Relationship between ac and mc ppt

### Relationship between AC and AVC and between AC and MC

Definition of Cost; The Short Run Relationship Between Production and Cost; The . with the variable inputs, then the MC, AVC, and AC will all shift downward. Let us learn about the relationship between Ac and AVC and between AC and MC. First, AC = AFC + AVC. Second, AC = TC/Q. ADVERTISEMENTS. Marginal Cost: Additional cost of producing one more unit of output. Slope of TC. MC = dTC/dq. AC is closely related to returns to scale. Relationship between.

Costs in the Short Run fixed cost Any cost that does not depend on the firms level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run. Average fixed cost declines as quantity rises. A total variable cost curve expresses the relationship between TVC and total output.

Marginal costs reflect changes in variable costs. A fixed factor implies diminishing returns declining marginal product and a limited capacity to produce. As that limit is approached, marginal costs rise. Costs in the Short Run Variable Costs The Shape of the Marginal Cost Curve in the Short Run In the short run, every firm is constrained by some fixed input that 1 leads to diminishing returns to variable inputs and 2 limits its capacity to produce. As a firm approaches that capacity, it becomes increasingly costly to produce successively higher levels of output.

Marginal costs ultimately increase with output in the short run. Marginal cost is the cost of producing each additional unit. Thus, the marginal cost curve shows how total variable cost changes with single- unit increases in total output. When marginal cost is above average cost, average cost is increasing.

## Average Cost and Marginal Cost (With Diagrams)

Therefore, if a firm is willing to produce OX0 level of output, it will construct a plant corresponding to SAC0 and will operate on this curve at point K. Different Names of LAC: LAC is also known by the following names: As in the long-run indivisible factors can be used to their full capacity, therefore, LAC curve will be surrounding the SAC.

It will not cut SAC curves or rise upward. LAC is also known as planning curve. With its help, a firm can plan as to which plant; it should use to produce different quantities of output so that production is obtained at minimum cost.

## Relationship between AC and AVC and between AC and MC

This fact can also be explained with the help of fig. If the firm has to produce OQ1 output, it will select small plant. If it wants to produce OQ3 level of output, it will select the large output plant. If the firm begins production with the small plant and demand for its product rises slowly, it will produce at minimum cost up to OA quantity of output.

After OA amount of output its cost begins to rise. In case, demand for the product of the firm increases to OB then the firm will produce either with small or medium plant. It indicates that in the long run, increase or decrease in costs is relatively less.

It is so because LAC represents the minimum average cost of different quantities of output so there exists less possibilities of fluctuations. Long-run marginal cost shows the change in total cost due to the production of one more unit of commodity. Generally, the relation between long-run marginal cost and long run average cost is similar to that of what it is in short run AC and MC. It is so because in the long run all factors are variable.

It can be shown with the help of a figure At a minimum point i. SMC refers to the effect on total cost due to the production of one more unit of output on account of change in variable factors. LMC refers to change in total cost due to production of one more or less unit of output due to change in all factors.

When a firm selects a proper scale of plant in order to produce a given quantity of output then at this level of output short run and long run marginal cost curves are equal. This can be shown with the help of fig. Modern Theory of Cost Curves: Modern theories of costs have been provided by economists like Stigler, Andrews, Sargent, Florence and Friedman etc.

According to traditional theory of costs, costs are of U-shape. But according to modern economists, in real life cost curves are L-shaped.

This is the cost of indirect factors, that is, the cost of the physical and personal organization of the firm. The fixed costs include costs on account of: The average fixed cost curve, under these circumstances will be as shown in Fig. The firm has some largest capacity units of machinery which set an absolute limit to expansion of output in the short run.

This is indicated by boundary line M in the diagram. The firm also has some small sized machinery which set a limit to expansion.

### Average Cost and Marginal Cost (With Diagrams)

This is shown by the boundary line N. N, however, is not an absolute limit because the firm can expand its short run output up to M by paying overtime to labour for working longer hours. In this case, the AFC is shown by the dotted line ab.

The firm can also expand output by purchasing some additional small-sized machinery. In modern economics, the average variable cost includes wages of labour employed, cost of raw- material, and running expenses of machinery.

The short run average variable cost curve in modern-micro economic theory is saucer-shaped, that is, it is broadly U-shaped but has a flat stretch over a range of output. This flat stretch represents the built-in reserve capacity of the plant. The falling portion of the SAVC shows reduction in costs due to better utilization of the fixed factor like machinery and also due to improvement in the skill and efficiency of labour.

Better efficiency of labour helps in reducing wastage of raw-material and achieving better utilization of the whole plant. On the other hand, rising portion of the SAVC curve indicates declining labour efficiency due to longer hours of work, rising costs due to payment of over-time wages, frequent breakdown of machinery, and wastage of raw-materials.

This has been shown in Fig. Short Run Average Cost Curve: According to modern economists, short run average cost curve is continuously falling up to a given level of output.