Marginal Costs of Production
Presently, let us a movie to the short run marginal cost (MC) curves. MC is the change in TVC and therefore, it varies with AVC. In a linear total cost function the MC = AVC. For example,
TC = 100 + 5Q
AVC = 5
Following the averages marginal rule, as the AVC falls, MC falls faster than AVC. As the AVC reaches a minimum, the MC coincides with AVC level, as the AVC starts rising, the MC rises faster ahead of AVC. Thus, MC passes thought the minimum point on the AVC. Same relationship holds good for AC and MC. At point S, if the price happens to be equal to min. AVC = MC, it is called the ‘shut down point (S)’ whereas the price is equal to AC, it is called ‘Break Even Point (B)’.
In a practice, variable costs remain proportionate to total output up to a point at which engineered total plant capacity is reached. Any attempt to increase output beyond the rated plant capacity generally result in a sharp increase in variable costs. This is because management tries to use variable inputs to compensate for the non-availability of fixed inputs. We can have different assumptions as to how costs behave.
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