question_answer

Define cost. State the relation between marginal cost and average variable cost.

Or

Define revenue. State the relation between marginal revenue and average revenue.

Answer:

Cost or cost of production refers to the expenditures incurred or payments made by a firm to various factors of production (such as, land, labour, capital and entrepreneur) and also non-factors of production (such as, raw materials, etc.)

Relationship between AVC and MC

(1) When AVC is falling, MC falls at a faster rate and stays below AVC curve.

(2) When AVC is rising, MC rises at a faster rate and remains above AVC curve.

(3) When AVC is at minimum point (y), MC is equal to AVC.

MC curve cuts AVC curve at its minimum point.

(4) The minimum point of MC curve (x) will always lie left to the minimum point of AVC curve (y).

(5) AVC and MC both are derived from TVC.

\[AVC=\frac{TVC}{Q}\]

\[MC=\frac{\Delta TC}{\Delta Q}=\frac{\Delta TVC}{\Delta Q}\]

Revenue is the money income for a firm which it receives from the sale of goods produced. In other words, revenue refers to the sale proceeds or sales receipts.

Relationship between MR and AR

The relationship between AR and MR can be studied under two forms of market- under Perfect Competition market and under Imperfect Competition market.

1. under perfect competition market: AR equals MR throughout all output levels. Graphically, MR curve is a straight horizontal line parallel to the x-axis and coincides with the AR curve.

2. under imperfect competition market: As output increase both AR and MR falls. However, AR remains greater than MR at all levels of output. Also, when AR curve become zero, then the MR curve is negative. Graphically, both AR curve and MR curve are downward sloping but the AR curve remains above the MR curve.