(A) Behavior of costs: Cost
of production is a function of the volume of output produced. Total
cost is made up of two components. Some of the inputs are fixed and
indivisible. Their aggregate cost remains constant and hence goes on
falling in an average proportion as output increases. Other factors of
production are variable and go on increasing with the level of output
produced. Hence the variable cost of production continuously increases
but in different proportions. The behavior of the total cost of
production is a mixture of these two influences. Like the law of
returns there are similar laws for cost behavior. The cost behaves
exactly in an opposite manner as compared to the behavior of the returns
or the output. If input worth $1 produces 3 units of output, then per unit
of good, cost of production is 33 cents. If output produced decreases
to 2 units per dollar, cost increases to 50 cents per unit and if the
output produced increases to 4 units per dollar, cost decreases to 25
cents per unit of output.
Cost of Input | Output Produced | Cost per Unit |
$1 | 2 | 50 cents |
$1 | 3 | 33 cents |
$1 | 4 | 25 cents |
The phase of Increasing Marginal Returns corresponds
with Diminishing Marginal Cost. The Diminishing Marginal Returns phase
corresponds with Increasing Marginal Cost and Constant Marginal Returns
are equivalent to Constant Marginal Cost. This is diagrammatically
represented as-
Returns Behavior Costs Behavior
IMR ® DMC
CMR ® CMC
DMR ® IMC
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