Economics · Microeconomic decision-makers. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
Costs are of two kinds. Fixed costs do not change with output and must be paid even at zero output, such as rent and loan interest. Variable costs change directly with output, such as raw materials. Together they make total cost.
Dividing a cost by output gives the average cost per unit. Average fixed cost always falls as output rises, because the same fixed cost is spread over more units. On a diagram, fixed cost is a horizontal line, and total cost starts at the level of fixed cost, not at zero.
Revenue is the money a firm receives from sales. Profit is total revenue minus total cost. Most firms aim to maximise profit; others aim for survival, growth or social welfare.
Thinking that total cost is zero when output is zero. At zero output only variable cost is zero, so total cost equals fixed cost.
Answer: Average total cost is Rs 55 a unit and profit is Rs 7,500 a week.
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