This document discusses production costs and different types of average costs. It defines average fixed costs, average variable costs, and average total costs. Fixed costs remain constant regardless of production quantity, while variable costs change with quantity. Average costs are calculated by dividing total costs by quantity. Marginal cost is defined as the change in total cost from producing one more unit. Formulae show marginal cost is the difference between total costs of two levels of output. A graph illustrates how marginal cost decreases initially as total cost rises at a diminishing rate, reaches a minimum, and then increases as the rate of change in total costs increases.

1. PRODUCTION
COST
PRIYANKA
ANKUR
ANKITA
BRIJ
GAURAV
ARSHPREET

3. OUTPUT
VARIABLE COST
TOTAL COST
FIXED COST

4. AVERAGE COSTS
• Average costs can be determined by dividing the firm’s
costs by the quantity of output it produces.
• The average cost is the cost of each typical unit of
product.
• Average Fixed Costs (AFC)
• Average Variable Costs (AVC)
• Average Total Costs (ATC)
• ATC = AFC + AVC

5. Fixed cost
Quantity
FC
AFC
Q
 
Variable cost
Quantity
VC
AVC
Q
 
Total cost
Quantity
TC
ATC
Q
 
FORMULAE & GRAPH

6. MARGINAL COST
Definition- The change in Total cost by producing
one more or one less unit of output .
The addition to Total Cost due to the addition of
one unit of output
Expression-
MC=Marginal Cost; TC=Total Cost of n units of output;
TCn-1=Total Cost of n-1 units of output; TC=Change in
Total Cost; Q=Change in Quantity
MC=TCn -TCn-1

7. Example: Total Cost =Rs 56 for 8 units then if 9 units are
produced then Total Cost=72 then MC of 9th unit will be (Rs
72 - Rs 56)=Rs 16
Output
(UNITS)
Fixed Cost
( RS)
Variable Cost
(Rs)
Total Cost
(Rs)
Marginal Cost
(Rs)
0 10 0 10 -
1 10 10 20 10
2 10 18 28 8
3 10 24 34 6
4 10 28 38 4
5 10 32 42 4
6 10 38 48 6
7 10 46 56 8
8 10 62 72 16

8. 0
2
4
6
8
10
12
14
16
18
0 1 2 3 4 5 6 7 8 9
MARGINAL COST
MARGINAL COST
OUTPUT

9. Relation Between Total Cost And Marginal Cost
 Marginal Cost is estimated as a
difference between total cost of two
successive unit of output.
Thus, MCn = TCn – TCn-1
OR
MC = Change in TC
Change in Q
When TC rises at a diminishing rate, the
MC declines.
When the rate of increase in TC stops
diminishing, the MC is at its minimum .
When the rate of increase in TC starts
rising, the MC is increasing.

11. RELATIONSHIP
TC
AC
MC TC
MC
AC
Both AC and MC are derived from TC.
AC = TC/Q
MC = TCn – TCn-1
Where AC is lowest, MC=AC .
AC decreases with the increase in output and MC
relates to the cost of one more or one less unit
produced .
Initially TC = MC , then as TC increases, MC and AC
starts decreasing .
In later stage , AC increases but @ decreasing rate; MC
of producing extra unit goes on decreasing.
This leads to optimum utilization of resources.
Cost
Output