Basic Terms:
Money:
Money was discovered as a medium in which every 'commodity was convertible' & is liquid i.e., it can take the shape of the commodity. The most important function of Money is that it acts as a storage of value.It is important to remember that as the denomination of Money increases the liquidity decreases.
Above all, Money is NOT an end, it is a means to reach end & that is exactly why we strive earn it!
Cost:
It is the amount incurred to produce a commodity or a product. Everything has a price-tag & money helps in obtaining it. Profit is a part of Cost.
There are two types of Costs:
There are two types of Costs:
1. Fixed Cost
2. Variable Cost
1. Fixed Cost:
It is a cost that remains unchanged with the change in level of units of production e.g., rent of factory premises. Let's refer to the fig. below, we can easily understand that the fixed cost per unit at all the pints a,b,c & d is equal i.e.. fixed cost of every units at every point is equal.
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| 2. Variable Cost: It is the cost that changes or varies with the change in level of units of production e.g., raw-material expenses, electricity expenses, adhoc-labour etc. Let's refer to the figure below, the variable cost is V1 at Q1 level of production which increases to V2 at Q2 level of production. Therefore, implying that VC increases with increase in level of production. |
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| Total Cost: The sum total of Fixed Cost & Variable Cost is called Total Cost. Let's refer to the fig. below, we can easily understand the relationship between fixed cost, variable cost & total cost.  Average Cost (AC): It is a ratio of total cost to number of units produced. In certain circumstances or in the absence of clear direction, average cost can be presumed as 'Price' of the product. Marginal Cost (MC): Marginal Cost is the rate at which total cost increases, the word Marginal means 'Last'. Mathematically, MC = Total Cost Of N - Total Cost Of N-1 = TCn - TCn-1 we know Total Cost is sum of Fixed & Variable Cost so, it can also be equal to = (TFCn + TVCn) - (TFCn-1 - TVCn-1) = (TFCn + TVCn - TFCn-1 + TVCn-1) we know fixed cost per unit of production is same, so the Eq'n = TVCn - TVCn-1 Hence we can also say that Marginal Cost is the difference of Total Variable Cost of N & Total variable Cost of N-1, where N is the total number of product produced. Let's refer to a schedule below: The total cost of producing 1 unit of a product is Rs.5; so on & so forth for 5 units the total cost is Rs.20. The average cost is Rs.5 (5/1) for 1 unit of production; so on & so forth for 5 units the average cost is Rs.4 (20/5). The marginal cost is the rate at which total cost increases or decreases i.e. for 1 unit of production it is 5 (5-0) for 2 units of production it is Rs.3 (8-5) so on & so forth for 5 units it is 8. Quantity Total Cost Average Cost Marginal Cost 1 5 5 5 2 8 4 3 3 9 3 1 4 12 3 3 5 20 4 8 Now, let's join these point to obtain the respective AC & MC curves.  |