(i) All costs that vary with output, together with the costs of administration are known as prime cost.
(ii) In short, prime cost = variable costs + cost of administration.

(i) It refers to all expenses that are directly associated with business activities but not with asset creation.
(ii) A floating cost is necessary to run the day-to-day business of a firm.

(i) It refers to all payments made to the resources owned and purchased
(ii) It is the summation of explicit and implicit costs.
(iii) Economic Cost = Implicit Cost + Explicit Cost.

A cost incurred in the past and cannot be recovered anymore in future, once invested it is treated as drowned or disappeared.

Payment made to others for the purchase of factors of production is known as explicit cost. It is also called accounting cost or out of pocket cost.

(i) It refers to the total cost per unit of output.
(ii) ATC=TC/Q (or)
(iii) ATC=AFC+AVC

(iv) ATC curve is also a 'U' shaped curve.
(v) Initially the ATC declines reaches a minimum when the plant is operated optimally, and rises beyond the optimum output.
(vi) The 'U' shape of the AC reflected the law of the variable proportions.

(i) It refers to the total variable cost per unit of output.
(ii) It is obtained by dividing total variable cost (TVC) by the quantity of output (Q).
(iii) AVC = TVC/Q Where AVC - Average variable cost, TVC - Total variable cost,
Q - Quantity of output.

(i) It refers to the total cost borne by the social due to the production of a commodity.
(ii) Social cost is the cost that is not borne by the firm, but incurred by others in the society.
(iii) For example: Large business firms create air pollution etc.
(iv) It is also called as External cost.

Marginal revenue is the addition to the total revenue by the sale of an additional unit of a commodity. It is got by dividing change in TR by the change in quantity sold.
\(M R=\frac{\Delta T R}{\Delta Q}\), where MR = Marginal revenue.
\(M R=T R_{n}-T R_{n-1} \quad \Delta T R=\text { change in total revenue. }  \)
\(M R=T R_{n+1}-T R_{n} \quad \Delta Q=\text { change in total quantity. }  \)
\(T R_{n}=\text { total revenue of } n^{\text {th }} \text { item }  \)
\(T R_{n-1}=\text { total revenue of } n-1^{\text {th }}  item\)
\(T R_{n+1}=\text { total revenue of } n+1^{\text {th }}item\)

When AC is falling, MC remains below AC.
When AC becomes constant MC becomes equal to it.
When AC starts increasing MC is above the AC
MC always cuts AC at its minimum point from below.

TC = TFC + TVC
\(AVC=\frac{TVC}{Q}\)
\(AFC=\frac{TFC}{Q}\)
\(AC=\frac{TC}{Q}\)
(i) TC = 100 + Q³. Total cost has two components TFC and TVC.
(ii) TFC = is the total fixed cost which does not change with the level of output.
(iii) It is determined by putting the value of Q.
(iv) Given the total cost function T = 100+Q³
Q = units of output where Q = 10
Here TFC = 100 (TFC will not change with output changes)
TC 100 + (10)³
= 100 + 1000
TC = 1100
\(\therefore\)1100 = 100 + TVC
1100 - 100 = TVC
\(\therefore\)TVC = 1000
TVC = 1000, TC = 1100  \(\therefore\) TFC =?
TC = TFC + TVC
1100 = TFC + 1000
1100 - 1000 = TFC
\(\therefore\)TFC = 100
\(AFC=\frac{TFC}{Q}\)
TFC = 100, Q = 10
\(\therefore\) AFC = 10
\(AFC=\frac{TFC}{Q}\)
TVC = 1000, Q = 10
\(\therefore\) AVC = 100
\(AC=\frac{TC}{Q}\)
TC = 1100, Q = 10
\(\therefore\) AC = 110
or
AC = AFC + AVC
AFC = 10, AVC = 100
AC = 10 + 100
\(\therefore\) AC = 110

(i) Total revenue is the amount of income received by the firm from the sale of its products.
(ii) It is obtained by multiplying the price of the commodity by the number of units sold
(iii) TR = P x Q
Where TR = Total Revenue
P = Price
Q = Quantity Sold
For example: A cell phone company sold 100 Cell Phones with the price of Rs. 500 each TR is Rs. 50,000 (TR = 500 x 100 = 50,000)

When price is declining:
With increase in quantity sold the behaviour of TR is shown in the following table and diagram

\(A R=\frac{T R}{Q}\)

\( M R=T R_{n}-T R_{n-1}\)

Constant AR & MR (fixed price)
When price remains constant, MR is also constant and AR / MR curves coincide.
Declining AR and MR
When a firm sells large quantities at lower prices both AR & MR will fall but the fall in MR will be steeper than the fall in AR.

(i) MR is lower than AR.
(ii) Both AR and MR slope downwards.
(iii) MR divides the distance between AR curve and axis into 2 equal parts.
(iv) The decline in AR need not be a straight line or linear.
(v) If the prices are declining with the increase in quantity sold, the AR can be nonlinear, taking a shape of concave or convex to the origin.

\(\text { TC }=10+Q^{3}  \)
\(A C=\frac{10}{Q}+\frac{Q^{3}}{Q}=\frac{10}{Q}+Q^{2}=\frac{10}{5}+5^{2}=2+25=27  \)
\(\text {AVC }=\frac{Q^{3}}{Q}=Q^{2}=5^{2}=25  \)
\(\text {TFC }=10  \)
\(\text {AFC }=\frac{10}{\mathrm{Q}}=\frac{10}{5}=2 \)
\(Ans; \mathrm{AC}=27 ; \quad \mathrm{AVC}=25 ; \quad \mathrm{TFC}=10 ; \quad \mathrm{AFC}=2.\)