Distinguish between:
(a) Fixed Cost and Variable Cost;
(b) Marginal Cost and Marginal Revenue;
(c) Total Cost and Total Revenue;
(d) Average Cost and Average Revenue
(a)Fixed Cost of production is the sum of the cost of all the fixed inputs used in a production process. Fixed Costs do not change with the changing output in the short run. This means that no matter the level of production, they remain fixed. Example of this is cost of machinery, land etc. FC = TC — VC.
Variable Cost, on the other hand, is the sum of the cost of all the variable inputs of production. It includes the cost of labour, raw materials and any other item whose cost changes as output changes in the short-run. Therefore, the more goods and services produced, the higher they tend to be and vice versa. VC = TC — FC.
(b) The difference between marginal Cost and Marginal Revenue; is that marginal cost is the change in total cost as a result of a unit change in output. Marginal cost does not depend on fixed cost but on the variable cost. MC = change in \(\frac{TC} {Dq}\)
On the other hand, Marginal revenue is the change in total revenue as a result of a change in quantity sold. MR = \(\frac{DTR} {Q}\)
(c) Total Cost of production is the sum of all the fixed and the variable cost incurred during production process. This varies with the level of output. TC = FC + VC. Total revenue is the total amount of money earned by selling a given level of output. Total revenue may increase, remain constant or decrease with changes in price. TR = p x q
(d) Average Cost is the total cost (TC) divided by the Total Output (Q). It is the unit cost, i.e., \(\frac{TC} {Q}\) = AC.
Average Revenue is the unit price. It is the Total Revenue (TR) divided by the output (Q).
\(\frac{ TR} {Q}\)- AR.
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