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Maximization of profit is an
important business objective for
the firm
Profit = Revenue- Cost
Thus to know the profitability of
any decision we need to
understand the costs
Cost
Total Cost Curve
Total Variable
Cost Curve
TFC
TFC
Quantity
0.8
0.6
COST
0.4 AFC
0.2
0
0 500 1000 1500 2000
OUTPUT
0.8
0.6
COST
AVC
0.4
ATC
0.2
0
0 400 800 1200 1600 2000
OUTPUT
11
DTA-Managerial Economics
Marginal costs
0.8
0.6
AVC
COST
0.4 ATC
MC
0.2
0
0 500 1000 1500 2000
OUTPUT
AC/AR
MC ATC
A (Rs.150)
AVC
BE (Rs.51)
B (Rs.45)
C (Rs.34)
Shut down
point
AFC
OUTPUT
16
DTA-Managerial Economics
Implications of factor substitution
(1)
COST
SRATC1
SRATC2
AC1
AC2
AC3
Q1 Q2 OUTPUT
COST
SRATC1 SRATC2
AC1
Q1 Q2 OUTPUT
COST
PER UNIT
ATC3
ATC2
ATC1
LRAC
x1 x2 x3 OUTPUT
COST PER
UNIT
LRAC
attainable
c1
c2
unattainable
Q1 OUTPUT
COST
PER UNIT
LRAC
ng
inc
asi
rea
cre
sin
de
g
constant
MES
OUTPUT
Qm
Production techniques:
Maruthi Suzuki and Rolls Royce
By-products