ACKNOWLEDGEMENT
I would like to express my sincere gratitude to my
Mathematics teacher for their constant
encouragement, valuable guidance and support
throughout the preparation of this project. Their
clear explanations and conceptual teaching helped
me greatly in understanding the relationship
between mathematics and economics, especially
in the area of cost analysis.
I would also like to thank my school for providing
me with a positive learning environment, reference
materials and resources that supported my
research work. I am equally grateful to my family
and friends for motivating me and assisting me
whenever required.
This project has not only enhanced my
understanding of the Cost (C), Average Cost (AC)
and Marginal Cost (MC) functions, but also helped
me see how calculus can be applied in real
economic decision-making. I sincerely appreciate
everyone who helped me complete this project
successfully.
Content
Total Cost Function (C)
Average Cost Function (AC)
Marginal Cost Function (MC)
Relationship between AC & MC
Solved examples
Applications
Conclusion
Bibliography
Total Cost Function (C)
The Total Cost Function represents
the total expenditure incurred by a firm in the
process of producing a given quantity of output. If
the firm produces x units of output, then the total
cost required to produce those x units is denoted
by C(x).
In general, cost incurred by a firm can be
divided into two components:
[Link] Cost (FC)
[Link] Cost (VC)
So,
C(x) =FC+VC
1. Fixed Cost (FC)
Fixed Cost refers to the cost which remains constant,
irrespective of the level of output. Even if the firm
produces zero units, the fixed cost must still be paid.
Examples:
• Rent of the factory building
• Property tax
• Salaries of permanent workers
• Interest on loans
• Depreciation of machines
Therefore:
FC = constant
2. Variable Cost (VC)
Variable Cost is the cost which changes directly with
the level of production. As output increases, this cost
increases. When output is zero, variable cost is
generally zero.
Examples:
• Cost of raw materials
• Wages of temporary labour
• Fuel and electricity used in production
• Packing material
Thus,
VC=depends on x
Total Cost Function Example
Consider the function:
C(x) =50+5x+x2
Here:
50 is Fixed Cost
5x is the linear variable cost, increasing at a
constant rate
x² is the non-linear variable cost, increasing at an
increasing rate
Graph of Total Cost Function
Average Cost Function (AC)
The Average Cost Function represents the
cost per unit of output. It is obtained by dividing the
Total Cost (C) by the number of units produced (x).
Using the cost function:
We get:
Graph of AC(x)
Marginal Cost Function (MC)
The Marginal Cost Function measures the additional
cost incurred when one more unit of output is
produced. In other words, it tells us how much total
cost increases when output is increased by 1 unit.
Mathematically, Marginal Cost is the rate of change of
Total Cost with respect to output:
Given Total Cost Function:
To find MC, we differentiate C(x):
The derivative of 50 (a constant) is 0
The derivative of 5x is 5
The derivative of x² is 2x
Interpretation of MC(x)
The term 5 represents the base cost added for
each unit produced.
The term 2x indicates that the cost of producing
additional units increases as output increases.
This means:
At low levels of output, producing one extra unit
costs less.
At high levels of output, producing one extra unit
costs more.
This rise in marginal cost happens due to diminishing
returns, where resources become more strained as
production increases.
Graph of MC(x)
Relationship between AC and MC
The Average Cost (AC) and Marginal Cost
(MC) are closely related to each other. Their relationship
is derived using calculus and is very important in both
mathematics and economics.
From the cost functions:
To analyse how AC behaves, we differentiate AC(x):
Given:
Differentiating:
To find the value of x at which AC is minimum, we set
the derivative equal to zero:
So, the Average Cost is minimum when
Now, evaluate MC at this same value:
At , AC and MC become equal.