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Class 12 Exam > Class 12 Videos > #66 | RELATIONSHIP OF AC, AVC & MC | THEORY OF COST IN ECONOMICS | | PART 8

#66 | RELATIONSHIP OF AC, AVC & MC | THEORY OF COST IN ECONOMICS | | PART 8 Video Lecture - Class 12

FAQs on #66 - RELATIONSHIP OF AC, AVC & MC - THEORY OF COST IN ECONOMICS - - PART 8 Video Lecture - Class 12

1. What is the relationship between AC, AVC, and MC in the theory of cost in economics?

Ans. In the theory of cost in economics, AC (Average Cost), AVC (Average Variable Cost), and MC (Marginal Cost) are interrelated. AC is the total cost per unit of output, calculated by dividing total cost by the quantity of output. AVC is the total variable cost per unit of output, calculated by dividing total variable cost by the quantity of output. MC is the additional cost incurred for producing one extra unit of output. The relationship between AC, AVC, and MC is as follows: MC intersects both AC and AVC at their minimum points. When MC is below AC and AVC, AC and AVC decrease. When MC is above AC and AVC, AC and AVC increase. Therefore, MC influences the shape and behavior of both AC and AVC.

2. How is average cost (AC) calculated in economics?

Ans. Average cost (AC) in economics is calculated by dividing total cost (TC) by the quantity of output (Q). It is represented by the formula AC = TC/Q. Total cost includes both fixed costs (costs that do not vary with the level of output) and variable costs (costs that change with the level of output). By dividing the total cost by the quantity of output, we can determine the average cost per unit of output. Average cost is an important measure in determining the efficiency and profitability of production in the long run.

3. What is the significance of marginal cost (MC) in the theory of cost in economics?

Ans. Marginal cost (MC) plays a crucial role in the theory of cost in economics. It represents the additional cost incurred for producing one additional unit of output. MC helps firms make decisions regarding production levels and pricing. If MC is lower than the price of the product, it is profitable to increase production. If MC is higher than the price, it is advisable to reduce production. MC intersects both average cost (AC) and average variable cost (AVC) at their minimum points, influencing their shape and behavior. Moreover, MC also determines the supply curve of a firm in perfect competition, as firms tend to supply additional units as long as MC is below the market price.

4. How does average variable cost (AVC) differ from average cost (AC) in economics?

Ans. Average variable cost (AVC) and average cost (AC) are two important cost measures in economics, but they differ in their calculation and components. AVC represents the total variable cost per unit of output, calculated by dividing total variable cost (TVC) by the quantity of output (Q). On the other hand, AC represents the total cost per unit of output, calculated by dividing total cost (TC) by the quantity of output. While AVC considers only the variable costs (costs that change with the level of output), AC includes both fixed costs (costs that do not vary with the level of output) and variable costs. Therefore, AC is always equal to or greater than AVC, as it incorporates all costs, including fixed costs.

5. How does the relationship between AC, AVC, and MC impact a firm's production decisions?

Ans. The relationship between average cost (AC), average variable cost (AVC), and marginal cost (MC) plays a significant role in a firm's production decisions. When MC is below AC and AVC, producing additional units of output reduces the average cost per unit, leading to economies of scale. This encourages firms to increase production and expand their operations. Conversely, when MC is above AC and AVC, producing additional units of output increases the average cost per unit, resulting in diseconomies of scale. In such cases, firms may choose to reduce production or optimize their operations to lower costs. Therefore, the behavior of AC, AVC, and MC guides firms in making efficient production decisions to maximize profitability.

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Nov 15, 2024 Last updated

#66 | RELATIONSHIP OF AC, AVC & MC | THEORY OF COST IN ECONOMICS | | PART 8 for Class 122024 is part of Class 12 preparation. The notes and questions for #66 | RELATIONSHIP OF AC, AVC & MC | THEORY OF COST IN ECONOMICS | | PART 8 have been prepared according to the Class 12 exam syllabus. Information about #66 | RELATIONSHIP OF AC, AVC & MC | THEORY OF COST IN ECONOMICS | | PART 8 covers all important topics for Class 122024 Exam. Find important definitions, questions, notes, meanings, examples, exercises and tests below for #66 | RELATIONSHIP OF AC, AVC & MC | THEORY OF COST IN ECONOMICS | | PART 8.

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