Question

What do you understand by cost? Define Total Cost, Average Cost and Marginal Cost with diagram.

Hint:

Total Cost is the sum of all costs (fixed and variable), Average Cost is the per-unit cost, and Marginal Cost is the cost of producing one more unit of output.

Answer 1

In economics, the term 'cost' refers to the expenditure incurred by a firm in the process of production. It involves the total money spent on purchasing resources like labor, raw materials, machinery, etc. - Total Cost (TC): The total cost incurred in producing a given level of output. It is the sum of total fixed costs (TFC) and total variable costs (TVC): \[ TC = TFC + TVC \] - Average Cost (AC): The cost per unit of output, calculated by dividing the total cost by the quantity of output: \[ AC = \frac{TC}{Q} \] - Marginal Cost (MC): The additional cost incurred by producing one more unit of output. It is calculated as the change in total cost when output is increased by one unit: \[ MC = \frac{\Delta TC}{\Delta Q} \]