What is the behaviour of average fixed cost as output is increased? Why is it so?
Average fixed cost (AFC) is the fixed costs of production (FC) divided by the quantity (Q) of output produced. Fixed costs are those costs that must be incurred in fixed quantity regardless of the level of output produced. It is derived by dividing the Total Fixed Cost by quantity of output produced. That is,
TFC represents Total Fixed Cost.
Q represents units of output produced.
Average fixed cost is high at relatively small output quantities and low at relatively large output quantities. The reason, of course, is that as output increases, a given fixed cost is spread more thinly over a larger quantity.
Secondly, average fixed cost remains positive, it never reaches a zero value, because average fixed cost is a rectangular hyperbola. This happens because AFC is defined as the ratio of TFC to output. We know that TFC remains constant throughout all the output levels and as output increases, with TFC being constant, AFC decreases .When output level is close to zero, AFC is infinitely large and by contrast when output level is very large, AFC tends to zero but never becomes zero. AFC can never be zero because it is a rectangular hyperbola and it never intersects the x-axis and thereby can never be equal to zero.
Give meaning of 'returns to a factor.'
Returns to a factor relates to the short-period production function when one factor is varied keeping the other factor fixed. The Law of Variable Proportion can be regarded as 'Returns to a Factor'.
A consumer buys 18 units of a good at a price of Rs. 9 per unit. The price elasticity of demand for the good is (−) 1. How many units the consumer will buy at a price of Rs. 10 per unit? Calculate.
Initial quantity demanded = 18
Initial price =Rs 9 per unit
New price = Rs 10 per unit
Price elasticity of demand (-)1
Price elasticity of demand (ed) = Percentage change in quantity demanded/ Percentage change in price.
ed = (△Q/Q)÷(△P/P)
-1 = (Q2-18)/18 * 9/(10-9)
-1 = (Q2-18)/18 *9/1
(-1/9)*18 = (Q2-18)
-2+18 = Q2
Q2 = 16
Therefore, at a price of Rs 10, the consumer will buy 16 units of the goods.
Explain the central problem 'for whom to produce.'
The problem for whom to produce refers to selection of the category of people who will ultimately consume the goods. Since resources are scarce in every economy, no society can satisfy all the wants of its people. Thus, a problem of choice arises. The economic problem of "For whom to Produce" basically focuses on the distribution mix of the final goods and services produced. The distribution of the final goods and services is equivalent to the distribution of National Income (or National Product) among the factors of production such as land, labour, capital and entrepreneur.
The problem can be categorised under two main heads:
(i) Personal Distribution: It means how national income of an economy is distributed among different groups of people.
(ii) Functional Distribution: It involves deciding the share of different factors of production in the total national product of the country. Guiding Principle of ‘For whom to Produce’: Ensure that urgent wants of each productive factor are fulfilled to the maximum possible extent.
State the relation between marginal revenue and average revenue.
The average revenue (AR) of a firm is defined as total revenue per unit of output. The marginal revenue (MR) of a firm is defined as the increase in total revenue for a unit increase in the firm’s output
1. Both AC and MC are derived from total cost (TC). AC refers to TC per unit of output and MC refers to addition to TC when one more unit of output is produced.
2. Both AC and MC curves are U-shaped due to the Law of Variable Proportions. The relationship between the two can be better illustrated through following schedule and diagram.
Relationship between AC and MC:
1. When MC is less than AC, AC falls with increase in the output, i.e. till 3 units of output.
2. When MC is equal to AC, i.e. when MC and AC curves intersect each other at point A, AC is constant and at its minimum point.
3. When MC is more than AC, AC rises with increase in output.
4. Thereafter, both AC and MC rise, but MC increases at a faster rate as compared to AC.
As a result, MC curve is steeper as compared to AC curve.
What is meant by revenue in micro-economics?
In microeconomics, Revenue refers to the amount received by a firm from the sale of a given quantity of a commodity in the market.
State the relation between total cost and marginal cost.
The marginal revenue (MR) of a firm is defined as the increase in total revenue for a unit increase in the firm’s output. While, Total Cost refers to the total cost of production that is incurred by a firm in the short run to carry out the production of goods and services. It is the aggregate of expenditure incurred on fixed factors as well as variable factors. Total cost can be derived by summing up Marginal cost at all the levels of output.
The main points of relationship between TC and MC are:
1. Marginal cost is the addition to total cost, when one more unit of output is produced. MC is calculated as: MCn = TCn – TCn-1
2. When TC rises at a diminishing rate, MC declines.
3. When the rate of increase in TC stops diminishing, MC is at its minimum point.
4. When the rate of increase in total cost starts rising, the marginal cost is increasing.
What is perfect oligopoly?
Perfect oligopoly is the form of oligopoly in which each firm produces homogeneous products. Here all products are perfectly substitutable. So, it can be also called as pure oligopoly. For example, cement industry or chemical industry.
Unemployment is reduced due to the measures taken by the government. State its economic value in the context of production possibilities frontier.
As initially, the production in the economy is below its potential due to unemployment, this suggests that the economy is operating at a point below the Production Possibility curve (PPC). As the government starts employment generation schemes, the unemployed resources get utilized. In a situation of full employment the economy would move to a point on the PPC. Hence, economic value is reflected in terms of increased output and income.
Define budget set.
The set of bundles available to the consumer is called the budget set. The budget set is the collection of all bundles that the consumer can buy with her income at the prevailing market prices. It is represented by the following condition of inequality: P1x1 + P2x2≤M.