Name : Iqra Zubair

Registration Id : [email protected]

Course Code : 8406

Course Name : Micro Economics

Level : BBA ( 4 Years )

Semester : Autumn ,2024

Assignment : 01

Allama Iqbal Open University

Q 1 ) What does the term “ utility “ signify and how does it correlate with purposeful

behaviour ?

A ) UTILITY IN MICRO - ECONOMICS

DEFINITION

To initiate the answer the term utility signifies the satisfaction people get by consuming

specified goods and services

Utility refers to consuming goods and services and getting satisfaction from

them .investopedia

Utility is one of the most significant and essential concepts without which microeconomics is

considered incomplete because utility shows how much satisfied or happy people are after

consuming goods and services it also shows the preferences of consumers

It also helps in identifying the consumer demand for better sustainability, utility is a very

much broad concept that encounters several other essentially multi layered ideas and concepts

that play an integral role towards the success of an economy and towards the growth in

seizing the opportunities available

TYPES OF UTILITY

Utility comes in many forms and types so below written are the three most common and

famous types of utility used worldwide in economic terminologies,

1. CARDINAL UTILITY

Cardinal utility shows that utility can be written and expressed in numerical form like the

customer is satisfied 9 out of 10 after purchasing a specified product

2. ORDINAL UTILITY

Now on second comes ordinal utility which focuses on using the rankings for preferences

rather than subjecting to quantifying the preferences in economy

 3. MARGINAL UTILITY

Now , this is the most famous type of utility which is crucial in microeconomics and it is

marginal utility which means the extra amount of happiness consumers get after consuming

an additional unit of good or service

MAJOR CONCEPTS IN UTILITY

There are three major concepts in utility that are essential in microeconomics

1. LAW OF DIMINISHING MARGINAL UTILITY

The first is law of diminishing marginal utility which states that whenever a consumer

consumes more and more of a certain good the happiness and the satisfaction that he or she

might be driving from that product eventually decreases

2. TOTAL UTILITY

Total utility is another good concept in microeconomics which explains the aggregate

satisfaction consumer gets from consuming every additional unit of the good or service

3. MARGINAL UTILITY

Marginal utility is definitely last but the most satisfaction providing concept in utility which

explains that consumers get more and more satisfaction and happiness after consuming each

unit of good or services , marginal utility typically works on the incremental satisfaction a

consumer drive from good in service

HOW UTILITY CORRELATES WITH PURPOSEFUL BEHAVIOR

Since purposeful behaviour in microeconomics refers to the visibility maximising principle

and making rational decision makings utility correlate with purposeful behaviour by the help

of following procedure

 CONSUMER CHOICES AND PREFERENCES

Consumer choices and consumer preferences are usually understood by the help of

understanding the correlation between the utility and purposeful behaviour because this
correlation signifies what does the customer want , what the desires of the customer are and

how these desires must be met and fulfilled

For instance, choosing between buying a laptop or IPad is an example of understanding

consumer choices but the help of correlation between utility and purposeful

behaviour ,whatever the consumer will think is most preferable to him and he will get the

most utility from will choose the desired product for himself

 ROLE OF CONSTRAINTS

There are a bunch of external factors like budget constraints and time constraints that pose

sometimes a limit and the majority times a opportunity to better use the relationship of this

concept in the field of microeconomics, this usually happens because of the limitations or

adaptation in consumer choices however at the same time influencing the behaviours of

individuals in an economy market as well

 BEHAVIORAL ECONOMICS INSIGHT

Behavioural economics insight differ from the classical theory of economy because the

classical theory bound to certain limitations but the behavioural economics insight provide a

more unbiased aspect , it also depicts the idea of emotions filled concept , real world

decisions often get deviated because of this non rational theoretical approach in

microeconomics

 SUBSTITUTION AND INCOME EFFECT

Substitution and income effect affects the correlation between utility and purposeful

behaviour in such a way that whenever the income of their consumer gets increased or

decreased , it also results in creating fluctuations in the utility and his behaviour towards

purchasing product and services in an economy, it plays a crucial role towards to this

approach

APPLICATIONS OF THIS CORRELATION IN REAL WORLD SCENARIOS

Below written is a description of real life applications that truly forecast and depict this

correlation between utility and purposeful behaviour in microeconomics,

 MARKET DEMAND

Utility changing results in change in the demand of consumers which overall results in

changing the aggregate market demand for instance , if we see the demand for purchasing

eco friendly product gets increased among certain consumers . It eventually increases the

aggregate market demand for all the customers wanting eco friendly products for purchasing

 CONSUMER WELFARE

Consumer welfare is another great aspect that is needed to be thought because it directly

influences and impact the policymakers regarding taxes, subsidies and all the financial

decisions for an economy . This kind of utility correlation also takes into account

regulations

 INDIFFERENCE CURVE ANALYSIS

Indifference curve analysis is a type of correlation between utility and purposeful behaviour

that is usually illustrated by the help of a graph , the type of curve that is being made on the

graph shows how much indifference is present in this correlation relationship between these

two ideas of microeconomics and this analysis helps policymakers to make define and more

accurate decisions in the economy

 REVEALED PREFERENCE THEORY

Revealed preference theory suggests that the consumer choices are dependent upon the utility

and fluctuates the utility which results in consumer satisfaction but it does not rely on

hypothetical data or any form of assumptions made solely on impractical aspects rather than

on revealed preference theory which focus is on observing consumer behaviour for inferring

utility

BOTTOM LINE
To summarise in short , utility is the most integral part of understanding consumer behaviour

and understanding what the desires of the customer are and how much satisfied the consumer

will be with the specified products and services , for doing so purposeful behaviour play a

significant role in this by providing insights on how consumers make certain choices

regarding different products and what factors influence their decisions. This is considered a

comprehensive study on the utility and the purposeful behaviour which help policymakers to

work on different major ideas of microeconomics like the taxes, subsidies and the regulations

that are made in an economy

Q 2 ) During the 1990s , numerous “ dot – com “ companies emerged with some like

Yahoo ,eBay and Amazon thriving while others struggled and failed .Explain these

diverse outcomes to how the market system addresses the question of “ what goods and

services will be produced “ ?

A ) DIVERSE OUTCOMES TO HOW THE MARKET SYSTEM ADDRESSES THE

QUESTION OF “ WHAT GOODS AND SERVICES WILL BE PRODUCED “

 INTRODUCTION

This is true that during the 1990s a vast number of dot com companies emerged with some

like Yahoo , eBay and Amazon that thrived while at the same time some other companies that

performed were struggled and eventually failed , this happened due to a number of various

reasons which are discussed in detail below and these are also some of the diverse outcomes

that addresses this economic question of what goods and services will be produced below is

a detailed and comprehensive discussion to this question,

1. RESOURCE ALLOCATION
The resource allocation is one of the most major factor that works towards the growth of dot

com companies in 1990s, majority successful and joint companies like Amazon, eBay and

Yahoo make sure that they are optimally understanding the needs of their customers and it is

effectively submerged this consumer preference towards the production and making of their

goods and services

Describing comprehensively Amazon, by carefully researching and understanding the needs

of customers analyse that the current needs of customer is not only the books but they want a

joint online store so they transformed Amazon from bookselling platform to a whole wide

range of buying and selling of goods and services , this was done for eBay and Yahoo as they

collectively emerged

2. ROLE OF CONSUMER DEMAND

Role of demand of consumer is in such a way which are very helpful gesture that helps

companies to flourish and sustain during the greatest financial obstacles periods in an

economy because whenever company gains an in depth understanding of their consumer

demand , they have to make sure what they are producing and must competitively align with

their consumer needs and hence it help them to grow even more drastically just like the

companies Amazon , eBay and Yahoo did during the 1990s era

3. ADAPTABILITY

Adaptability is one of the greatest factor that must be carefully analysed , one of the greatest

example for this answer is of Amazon . Amazon at the right time successfully analysed what

their customer wants and what is the demand of the current era and technology , what will be

the future for the newer future generation and hence they made it possible to turn their only

bookselling online store to a vast platform where every small or big product is sold in

multiple countries.

4. INVESTOR CONFIDENCE AND SPECULATIVE BEHAVIOR

During the 1990’s the period of dot com boom meet eBay , Amazon and Yahoo like

organisations to survive and eventually become successful giants but many in fact majority of

dot com companies during this time period failed because they invested heavily in gaining

current financial profits and did not focus on the long term success and they also did not

consider overcoming the obstacles on the road of financial sustainability , the financial

collapse occurred of these organisations however if we see Amazon , eBay and Yahoo they

manage to keep speculative methods and succeeded to gain the confidence of the investors

leading to their future and unamiable growth

5. GOVERNMENT REGULATIONS

During this growth time period of the 1990s majority companies failed because of the harsh

governmental regulations and not only these harsh government regulations but the companies

themselves were wrong when they consider using some unethical practises for flourishing

their organisations and as soon as the boom period started to decline , these unethical

practises were soon seen by the government and these organisations were then punished for

their crimes by the loss

6. EXTERNAL FACTORS

There are a ton of external factors that resulted in the companies like Yahoo eBay and

Amazon thriving while others struggling and eventually getting failed and the market system

addresses the question of what goods and services will be produced in an economy is majorly

due to being affected by the external factors like technological advancement, infrastructure

development and evenly changing economic conditions

7. TIMING

Timing is also one of the most crucial factors for addressing this question of what goods and

services will be produced for in an economical market because many entrepreneurs believe

on this quote that you should always make the right decision at the right time and at the
right place , this means that a perfect timing is significant for the success of any organisation

and any idea like Amazon at the right time considered changing their direction , eBay also

managed to make advancements and Yahoo also considered leveraging the emerging markets

technologies into their capitalised financial situations to grow and seize the opportunities that

were present in the economy for them

8. INNOVATION

During the 1990s boom period of route com companies Amazon , Yahoo and eBay choose to

demonstrate resilience throughout their organisations with the ever changing regulations and

obstacles that they were facing . For instance , if we discuss more in detail Yahoo was

initially emerged as an internet directory . Although it saw a huge potential in the market and

then they should have considered to innovate their organisation but what they did was the

reverse and this is one of the most to major failure of reason of failure of this dot com

company

9. MARKET FORCES

Market forces play a crucial role in outperforming the other competitors as it helps in

differentiating organisations from multiple superior advantages , for instance if we talk about

eBay they used a first mover advantage and even operational efficiency they analysed at the

same time Amazon continuously improved its operations by enhancing features like they

introduced one click purchasing option , they also introduced and innovated their company

by providing prime memberships of Amazon, choosing features like this meet these

companies unbeatable unsuccessful in an economy market

 THE OVERALL MARKET SYSTEM

The diverse outcomes of the dot com companies illustrate the question of the complex system

of what goods and services will be produced to in an economy , this answer in depth

shows what factors influence to the ever flourishing growth of biggest tech giants like
Amazon , eBay and Yahoo while what the reasons were ,due to which other companies

during the same 1990s boom period that emerged , struggled and then eventually failed . The

reasons that these companies strived was they overcome the obstacles , they faced the

challenges and they were always sustaining to grow and always seize to the optimistic

opportunities , while there were other companies that misallocated their resources , they

couldn’t face the competitive pressures and misunderstood the market needs and due to all

these reasons these companies were schemed to the failures, for understanding what goods

and services should be produced the customer businesses must resiliently work on

understanding the consumer needs and having optimal resources to meet those needs while

going high on profits

Q 3 ) What factors influence demand and how does a change in any of these

determinants affect the demand curve ? Differentiate between a change in demand and

a change in the quantity demanded ,highlighting the causes of each .

A ) FACTORS THAT INFLUENCE DEMAND

Factors that influence demand are also called as the determinants of demand because these

are the reasons due to which the demand level fluctuates like whenever any factor or

determinant of demand fluctuates, the demand gets increased or decreased as it typically

refers to the business of consumer towards purchasing a certain good or service , below

written are the most common factors that result in influencing the demand in an economy,

1. PRICE OF THE GOOD AND SERVICE

It works like whenever the price for a good or service increases , it eventually results in

decreasing the quantity demanded for that product or services and conversely if the price for
product or service decrease then it results in increasing the quantity demanded , this typically

shows how the law for demand works in an economy

2. INCOME OF CONSUMERS

Income of consumer refers to the procedure that whenever the income of consumer rises he

start to increase the demand and consider purchasing more sort of luxury goods but on the

other hand the inferior goods become much more less purchased by such kind of consumers

whose income gets increased and the same goes for vice versa situations

3. PRICE OF RELATED GOODS

It looks like whenever the price of related goods like the price for coffee gets increased then

it will result in increasing the price as well , but let's say that if the price of a complementary

good get increased like the prices of cars rises then it will also result in increasing the prices

of petrol or fuel used to power these goods

4. CONSUMER PREFERENCES

Consumer preferences keep getting changed and thus the demand for products and services

so , this is considered one of the most significant determinant of demand for instance ,

consumers now consider buying more eco friendly product so the demand for eco

friendly product gets increased

5. EXPECTATIONS OF FUTURE PRICES

If there is a concept in the mind of consumer that prices of a certain product will get

increased in the future maybe because of the global tensions occurring so they start to buy

those products even more, in good amounts, and hence the demand gets increased

6. SEASONAL FACTORS

Seasonal factors refer to the process when there is a certain kind of push season like during

winters people start to increase the demand for winter clothing for sweaters and warm
clothes , in the summer the demand for these goods get decreased so that's how seasonal

factors affect the demand for goods and services

7. DEMOGRAPHIC FACTORS

The demographic factors do affect the demand for goods and services like the age

distribution , population size and the market economy , to understand better let’s say that the

among Gen Z , smartphones specifically iPhones are most popular so they tend to buy those

products even more as compared to the Android phones

THE WAY A CHANGE IN ANY ONE OF THE DETERMINANTS AFFECT THE

DEMAND CURVE

Below written is detailed explanation on how does a change in the demand affects the

demand curve,

 INCREASE IN DEMAND

Demand gets increase , on a graph the demand goes upward or when the demand to shift to

the right it refers to the situation when the consumers start to spend more and more amount of

money on buying goods and services and they do not usually think much about the price

levels for instance, if the income of consumers become increased and they are tend to

purchase more luxury goods and more products that he or she could not purchase before

when the income was less

 DECREASE IN DEMAND

This is the second situation that occurs and the decrease in demand curve usually looks like

going leftward in a graph and this situation is when the consumer is not able to spend good

amount of money on buying goods and services because of certain situations explained above

for instance , we can take the example if the price for cars becomes increased then the fuel

which is gas and petrol will also become increased then the customer would not be able to

even buy fuel for his car

DIFFERENCE BETWEEN A CHANGE IN DEMAND AND A CHANGE IN THE

QUANTITY DEMANDED

Below written explains the difference between a change in demand and a change in the

quantity demanded for an economy,

CHANGE IN QUANTITY DEMANDED

 DEFINITION

Change in quantity demand refers to the movement of the demand curve whenever there is

a change in the price of goods and services

 EXAMPLE

Let’s consider that the prices for smartphones gets dropped from $200 to $150.00 then it will

result in increasing the quantity demanded for the smart phones from selling 50 units to

increase by 70 units

 CAUSES

Other factors remaining the same , change in quantity demanded is caused by a change in the

price for specific product and service

 EFFECT ON GRAPH

There is considered a downward movement when the price gets decreased and it result in

increasing the quantity demanded but there is considered an upward movement , it happens

when the price gets increased thus decreasing the quantity demanded for the product and

services

CHANGE IN DEMAND

 DEFINITION

Whenever due to a change in non price determinants of demand the entire demand curve gets

changed and gets fluctuated , this situation is called a change in demand

 EXAMPLE
Let’s continue this example with the above example that say, the income of the consumer

becomes increased then his demand for this smartphone will eventually be increased even

though the price does not drop or when the price gets increased by any amount

 CAUSES

There is not a single but multiple causes of a change in demand , this usually occurs by a

change in income , when the preference of consumer gets changed or when the trends in the

industry becomes changed , this is why price of related goods is another factor that caused

the change in demand for any good or service in an economy

 EFFECT ON GRAPH

When it comes to having effects on graph it typically shows rightward movement in the

graph whenever the price level increases and the demand also gets increased and it results in

providing leftward movement in the graph as the price level gets decreased and demand gets

decreased as well

CONCLUSION

To conclude demand is a key and significant component for an economy and for the

businesses to thrive and understand the customer even more better and to settle prices

accordingly as well there are a bunch of determinants and key factors that result in shifting

the demand curve to whether the negative or the positive side and each increase in demand

curve and decrease in demand curve has its own pros and cons that impact the economy in

multiple advantages and harming ways as well the change in demand and the change in

quantity demanded shows different movements on the graph and it depicts the policymakers

on how to operate the economy for better future results and what strategies should be taken

into account to stabilise

Q 4 ) Provide explanations, with examples ,for cross price elasticity of supply in the

short run and cross price elasticity of supply in the long run .

A ) CROSS PRICE ELASTICITY OF SUPPLY IN THE SHORT RUN

To measure the quantity supplied, the responsiveness of it to the change in price of another

good is considered the cross price elasticity of supply and when it comes to explaining in the

short run , it is oftentimes adjusted by keeping the production capacity fixed and also the

resources of producers constant . Cross price electricity of supply in the short run refers to

the adjustment in the supply in response to the changes in the prices of goods and services

CHARACTERISTICS

Following are the major characteristics for the cross price elasticity of supply in the short

run ,

1. There is seen limited resources flexibility because the producers usually do not

have the time to allocate the resources like they do not have the labour and do

not have the capital to allocate the resources from one good to another easily

2. Another characteristic for the cross price elasticity of supply in the short run is

the partial adjustment , as the degree of responsiveness is lower compared to the

cross price elasticity of supply in the long run

3. Production cycles and contract commitments results in reducing flexibility and

these are considered the time constraints that are crucial for the cross price

elasticity of supply in the short run

EXAMPLES

Below written is a detailed explanation with example for the cross price elasticity of supply

in the short run and how does it operate in an economy for various industries and for various

products ,

1. SUBSTITUTE GOODS IN PRODUCTION

There is a farmer that grows two crops barley and wheat ( good A and good B ) on the same

land , now let’s say that the price for barley becomes increased so the farmer decides to allot

more land for the production of the crop barley since this working is on short run , so the

adjustment is limited and the land is limited as well so we can conclude on the result to that

this relationship will be called positive relationship but at the same time this is inelastic , in

the short run as well the reason for this is the time is constrained as well as the allocation of

resources is constrained here

2. COMPLEMENTARY GOODS IN PRODUCTION

Let’s consider another example where the government on a large level is considering to

extract two different form of goods the first is they are extracting oil and the second is the

extraction of natural gas being done , called good A and good B, the price for natural gas

becomes increased to so the extracting natural oil , supply will be slightly increased because

of the natural gas as more wells are operated for this , this relationship is now be called

negative cross price elasticity of supply in the short run because of the production processes

are fixed

CROSS PRICE ELASTICITY OF SUPPLY IN THE LONG RUN

This is considered the most suitable method as cross price elasticity of supply in the long run

help the producers to reallocate resources , they can raise more capital , they also are more

able to enhance their operating facilities and production capacities can be enhanced or

reduced in accordance to whatever the requirement of producers are, as cross price elasticity

of supply in the long run offers more flexibility and more better timing to measure the

quantity supplied in response to the change in price in an economy

CHARACTERISTICS

Following are the major characteristics of cross price elasticity of supply in the long run,
 1. Between multiple goods the resources available can be reallocated , distributed

and evenly managed in accordance with the requirements

2. Another major characteristic of the cross price elasticity of supply in the long run

is it offers a strategic adjustments to producer in such a way that it respond to the

changing in prices , producers can allocate to different kind of technologies that

can also consider investing in other formal facilities and production capabilities

3. Since it becomes very much easy for organisations to become much elastic in

response to the price changes so organisations can fully adjust to their marketing

conditions

EXAMPLES

Following is a detailed explanation along with the examples for cross price elasticity of

supply in the long run and an explanation of how does it operate in an economy and in

various industries worldwide,

1. SUBSTITUTE GOODS IN PRODUCTION

To understand the price cross elasticity of supply in the long run lets considering example of

substitute goods in production where there is a garment manufacturing firm selling both

electric vehicles and gasoline powered cars now among these two goods , the price for the

gasoline powered cars gets increased , the organisation has decided to increase the production

of gasoline cars because in the long run it becomes very much enhanced for the manufacturer

to manage the assembling and introduce new facilities , this kind of relationship will be

considered positive in the long run the reason for this is producers have more time to manage

and adjust their operations

2. COMPLEMENTARY GOODS IN PRODUCTION

For an explanation of an example of complementary goods in production specifically for

explaining cross price elasticity of supply in the long run , let’s consider the scenario where
there is milk processing company that sells both cream and milk , good A and good B

respectively , now the price for cream gets increased , the company will have to expand their

herds and invest in more better milk processing equipment that will result in increasing the

supply of both goods , this kind of relationship will be considered negative form of

relationship the reason for this is the producers will have to make structural adjustment to

adjust the changing prices of both of these products

IMPLICATIONS

Following are some of the real world implications of the cross price elasticity of supply for

both in short run and long run,

1. FOR PRODUCERS

For producers it results in keeping a balance between substitute and complementary goods in

the short run , producers tend to focus on maximising their returns while having those

constraints and limited resources however when we look into the long run investment in new

technologies , it increase the results and expand into bigger facilities and operations , in

regard to the changing prices

2. FOR POLICY MAKERS

Cross price elasticity of supply help policymakers to make better policies regarding the

taxes, regarding the responsiveness to changing prices and other form of regulations , in the

short run , oil production facilities might reduce the natural gas production facilities but if we

look into the long run , then it results in stabilising the market

3. FOR MARKET ANALYSTS

Cross price elasticity of supply both in short run and long run not only help the producers and

to the economist , but it also paves a great role for the market analyst to forecast the change in

prices and also to forecast the supply adjustments whenever the inter relations are needed to

be worked upon
Q 5 ) Elaborate the concept of production cost theory in detail with hypothetical data

and examples. Use the help of a graph based on your hypothetical data and explain the

results .

A ) PRODUCTION COST THEORY

ELABORATION IN DETAIL

To elaborate in detail the concept of production cost theory so it is basically involved

between the relationship of input cost , output cost and the production cost , it is comprised of

five major components that result in providing useful and valuable insights to the economies

worldwide , the reason for this is it categorises the production cost into variable cost , fixed

cost and total cost and by the help of these three costs , average total cost and marginal cost

is computed , these two type of costs help businesses to know much better about the cost

structures , it also provide valuable information on the efficiency in production and facilities

being provided as well . Other than these aspects , the production cost theory focuses majorly

and effectively on the economies of scale and marginal cost theories

1. FIXED COST

Fixed cost is comprised of rent and wages of the permanent staff because fixed causes are

that kind of cost that does not change with the outcomes of the output level

 EXAMPLE
A factory has to pay a rent of $10,000 each month and it does not matter whatever number of

units they are producing in that factory

2. VARIABLE COST

As can be understand by the name itself variable costs are that kind of cost that does changes

with the production levels like the employees working on hourly rate or on per unit

production rate and wages

 EXAMPLE

To produce each unit in a factory $5 will be put into that

3. TOTAL COST

The sum of the fixed costs and variable cost is called the total cost

 EXAMPLE

$10,000 rent plus all the permanent wages plus all kind of variable cost including the $5 for

each unit the sum of these cost would be regarded as total cost

4. AVERAGE TOTAL COST

To calculate average total cost not only the variable cost and fixed costs are taken into

account but also the cost per unit is used for the purpose

 EXAMPLE

As an example let’s continue with the above one , the formula of average total cost equals

total cost divided by the quantity will be used effectively

5. MARGINAL COST

The additional cost that will be encouraged for producing an additional unit of output is

called the marginal cost

 EXAMPLE

To calculate marginal cost , the formula is the sum of total cost divided by the sum of output

is accounted in an economy
HYPOTHETICAL DATA

Output ( Q ) Fixed Cost ( Variable Average Marginal

Total Cost
FC ) Cost ( VC ) Total Cost Cost ( MC )
( TC )
( ATC )

00 Rs 10,000 Rs 0 Rs 10,000 Rs 0 Rs 0

01 Rs 10,000 Rs 5,000 Rs 15,000 Rs 1500 Rs 500

02 Rs 10,000 Rs 9,000 Rs 19,000 Rs 950 Rs 400

03 Rs 10,000 Rs 12,000 Rs 22,000 Rs 733.33 Rs 300

04 Rs 10,000 Rs 14,000 Rs 24,000 Rs 600 Rs 200

05 Rs 10,000 Rs 20,000 Rs 30,000 Rs 600 Rs 600

06 Rs 10,000 Rs 30,000 Rs 40,000 Rs 666.67 Rs 1000

GRAPH BASED ON HYPOTHETICAL DATA

EXPLANATION OF RESULTS

The above graph is based on the hypothetical data that is created to illustrate the production

cost theory , on this graph, output is measured on X axis and cost is measured on Y axis with

each line representing the numbers written above and below is in depth explanation of the

results that have got

1. FIXED COST

As can be seen by the above graph , the blue dotted line represents fixed cost as has been

written here and it lies in the graph at Rs 10,000 which is written in the table and this is a

straight line it truly represents the cost of Rs 10,000 remains fixed and does not get changed

throughout the whole period in an economy

2. VARIABLE COST

The green dotted line that is coming in the graph , being started from Rs 0 to getting towards

Rs 30,000 it shows that it is getting changed too and also get some curves which depicts that

it does get changed with the changings in the amount of raw materials and to every other

thing as well

3. TOTAL COST

For depicting total cost , we can see a smooth red line being started from Rs 10,000 and

coming upwards to the Rs 40,000 , it shows that it got started from the output level and went

on to increasing as well as the production keep getting increased

4. AVERAGE TOTAL COST

The purple dotted line shows average total cost and it rightly shows the economies of scale

and diseconomies in scale as well ,if we look into the above graph then this purple dotted -

dash line starts decreasing initially when the output rises but then it shows, so this represents

diseconomies in a scale and when it was initially decreasing it represented economies in scale
 5. MARGINAL COST

If we look into the graph then lying down towards x - axis is the orange line that shows

marginal costs , it also initially got decreased and the reason for this was increasing efficiency

but it also after 50 units got started to increase just like the average total cost , by doing so , it

indicated the diminishing marginal returns for an economy

BOTTOM LINE

For an economy production cost theory plays a great role because it not only provide

indications for resource management in the economy but it also shows how to analyse the

cost related with the production and manufacturing and it also help the economist to get to

know more about pricing decisions and the cost management by analysing fixed cost,

variable cost, total cost, average total cost and marginal cost . By understanding these

utilisable processes and efficiency in the organisation companies can better reduce the cost of

production and increase the chances of their profitability .

REFERENCES :