Distinguish between: (a) Fixed Cost and Variable Cost; (b) Marginal Cost and Marginal Revenue; (c) Total Cost and Total Revenue; (d) Average Cost and Averag...

Answer Details

(a) Fixed Cost vs Variable Cost. Fixed cost is a cost that does not change with the level of output in the short run; it must be paid even when output is zero (for example rent, insurance, salaries of permanent staff). Variable cost changes directly with output; it rises as more is produced and is zero when output is zero (for example raw materials, wages of casual labour, fuel).

(b) Marginal Cost vs Marginal Revenue. Marginal cost is the addition to total cost from producing one more unit of output, \( MC = \dfrac{\Delta TC}{\Delta Q} \). Marginal revenue is the addition to total revenue from selling one more unit, \( MR = \dfrac{\Delta TR}{\Delta Q} \). A profit-maximising firm produces where \( MC = MR \).

(c) Total Cost vs Total Revenue. Total cost is the entire cost of producing a given output, the sum of total fixed cost and total variable cost \( (TC = TFC + TVC) \). Total revenue is the total receipts from selling that output, price multiplied by quantity \( (TR = P \times Q) \). Profit is the excess of total revenue over total cost.

(d) Average Cost vs Average Revenue. Average cost is cost per unit of output, \( AC = \dfrac{TC}{Q} \). Average revenue is revenue per unit sold, \( AR = \dfrac{TR}{Q} \), which equals the price of the good. The gap between AR and AC per unit measures profit or loss per unit.