Producer Behaviour and Supply Test - 5

It refers to the per unit cost of production. 

AC=TC÷Q

MR will become negative when TR starts falling.

When MC

When MC=AC , AC is constant and at ita minimum point

When MC> AC, AC rises

The fixed costs remain constant at all levels of output. Suppose the fixed costs is Rs. 50,000 , then it will be the same at all levels of output and even at zero level of output, the fixed costs will be Rs. 50000. Since it remains at the same level, it is a horizontal straight line parallel to the X axis.

AC curve will always lie above the AVC and AFC curve because AC , at all levels of output includes both AVC and AFC.

when MR is declining but is positive, TR increases at a decreasing rate. After this, when MR becomes zero, TR is maximum and then when MR becomes negative, TR starts falling.

When MR is Zero , TR is at its maximum and constant. This can be seen from the following figure.

TFC is fixed for all levels of output. It does not vary with the level of output. For eg: rent of premises, payment of salary, interst on loan etc.

At break even point, the firm is able to meet all its cost. Break even point is the situation of normal profits ( No profit No loss). Any point below the point where TR=TC  is indicated by abnormal loses  and any point above TR=TC indicates abnormal profits

TFC will always be incurred even at zero level of output. So, even at zero level of output , TFC will be greater than zero as they involve payments like salary, electricity charges, telephone charges etc .

When more output is sold by lowering the price, then MR will fall. Till the point MR is positive, TR will rise and when MR becomes negative, TR starts falling. TR is at its maximum when MR is zero.

TVC directly varies with the level of output. When there is no output, TVC will be zero, as at zero level of output, no raw materials will be needed, no labour charges have to be paid etc. So there will be no variable cost at zero level of output.

Break even point refers to the point where the total revenue is equal to the total cost. Any point below the break even level when TC is less than TR will result in abnormal profits for the firm.

in the short run with increase or decrease in production, the variable factors are changed accordingly. for eg. labour, raw materials.

The AC curve is U shaped as it initially falls with increase in output.  Once the output rises till optimum level, AC starts rising. 

Both MR and AR falls with increase in sales.  However fall in MR is double than that in AR. MR curve is steeper than the AR curve. 

When MR is increasing, it means that the revenue earned by selling an additional unit is more than the revenue earned from the previous unit.  If the MR from the 1st unit is 20 and the TR is also 20 and the MR from the 2nd unit is 25 , then TR will become  20+25=45. Thus we can see that when MR is increasing TR increases at an increaing rate.

When MR becomes negative, TR also starts falling. Till the time MR is positive, there is some addition to the Total revenue, but when MR becomes negative, TR starts falling as there is a negative addition to the revenue . 

AR and MR curves are both inverted U Shaped curve. As long as MR increases, AR increases and MR curve lies above AR.

MR can fall to zero an even become negative but AR can neither be zero nor negative ad TR us always positive.

Average total costs is the sum of average fixed cost and average variable cost. Since it is average total cost it consists of both fixed and variable component of AC. ATC is also called as AC.

Break even point refers to the point where total revenue is equal to total cost.  

TR=TC

Dividing both sides by Q, we get AR=AC.

So break even point is also achieved when AR=AC.

TC is the sum of total fixed cost and total variable cost at various levels of output.  Since TFC remains same at all levels of output , the change in TC is entirely due to TVC. Therefore the vertical distance between TC and TFC curve is equal to TVC.

There are two necessary conditions for producer's equilibrium.

MC=MR and MC should cut MR from below or MC is rising. 

 There is always an element of TFC even at zero level of output. Because of this reason AFC can never be zero and though it lies close to the X axis it can never touch the X axis.