Law of Demand

Wednesday, August 3rd, 2011

Enlarge ImageEconomics is actually a study that deals using the production, distribution and consumption of goods and services. Here, the study of pattern of demand and supply, and the two’s relationship using the prices becomes really important. 1 really crucial principle of economics will be the 1 that describes the relationship between demand, supply and prices of a commodity or a service, and is recognized as the law of demand. Let us know what specifically will be the law of demand.

Law of Demand Explained

Statement: ‘All other factors being constant, a rise in cost for a good or a service will result in drop in demand of that commodity and vice versa.’

Similarly, when there is drop in its prices, the demand for a good or service rise. Many economists interpret the law of demand in a different sense. Economists also bring inside the aspect of supply and relate it to the costs and call it the law of demand and supply. This law lays down a quite simple relation that works similar to the relationship described within the law of demand, but in a different direction. The law states that if the cost of a product or a service rises, there is really a corresponding rise in its supply.

Now, take a close appear in the graph shown. Relating it to the definitions above, you’ll be able to easily realize the graphical representation of this law, which is recognized as the law of demand curve or simply the demand curve.

An Example

For better understanding, absolutely nothing better than a practical, real life example. Let’s consider the delicious pizza, for instance. You as a consumer will obviously purchase a lot more number of pizzas, if there is actually a fall in pizza prices. Now, consider the opposite, which is equally true. If there is really a rise in cost of pizza, a consumer will try to cut down on his expenses by eating much less pizzas. Consider the following table:

Price of a PizzaQuantity Purchased$2.0010$2.259$2.507$2.755$3.004
As a consumer you might clearly correlate using the fact illustrated inside the above table. You are able to clearly see how the cost demand pattern follows the law of demand curve.

Exceptions to the Law of Demand

Even though the law of demand holds good in most cases, you will find a couple of exceptional cases when this law doesn’t hold true. Here are some of these exceptions:

Giffen Goods: These types of commodities contain extremely necessary items without which a consumer cannot sustain normal living. For example, staple food items like potatoes, bajra, barley, etc. which are consumed mostly by poorer families do not follow this law. If there is rise in cost of these, a poor household has no option but to continue purchasing it. This results in no drop in demand and hence this case is an exception.

Natural Disaster: This can be a special condition in which the consumer value of necessary goods like staple food items, water, medicines, etc. do not follow the law of demand. During floods, hurricanes, earthquakes, etc. even goods with high prices have high demand as the people just cannot do without these goods in troubled conditions.

Goods of Status Symbol: You’ll find some commodities or services which are considered as a sign of elevated status by those who possess them. For example, air-conditioned cars, jewelery, etc. are some commodities which are used to showcase one’s wealth.

Anticipating Cost Rise: If the cost of a commodity is already high and a household expects an additional cost rise in near future, they might decide to stock it up and increase the acquiring of this good in the current high cost. This is yet another exception to the law of demand.

Rise in Income: If a cost rise is accompanied by a rise in income, a household may possibly not mind purchasing exactly the same product for a heightened rate. This again violates the law of demand as the quantity doesn’t change despite a rise in cost.

Read a lot more on:Demand and Supply AnalysisKeynesian EconomicsClassical Economics vs Keynesian EconomicsThis is exactly where we sum up the article on law of demand. This is 1 with the most important but easy to digest concept in economic studies and a proper understanding can prove handy in managing your household budget.

Posted in Eudcation Articles | Comments Off

Monetary Policy Vs. Fiscal Policy

Wednesday, August 3rd, 2011

Dear Readers,

The finest way to recognize the differences between these two policies is to simplify the constituents with the policies. So here goes?

Fiscal Policy Vs Monetary Policy: An Overview

As many of us know, the term monetary has been derived from the word ‘money’. The monetary policy basically deals inside the government functions that are related to money. Many among us believe that the government issues bank notes and coins, and sits back and enjoys the benefits of industrialization and economic growth. This belief is in fact a myth, as you can find numerous different functions that the government fulfills except from issuing the currency. These money-related functions come under the domain of monetary policy with the government. The general monetary policy with the government frequently includes functions such as maintaining the supply of money on the basis of current economic conditions, maintaining the availability of money, by changing the different banking and monetary indexes, and also controlling the rates of interest.

The monetary policy of nations is divided into two sub-policies, which are, expansionary policy and contractionary policy. The expansionary policy is usually used during the time of recessionary cycles. In order to increase the supply of money. This policy also involves, the reduction in rates of interest, which in turn combats the rising rate of unemployment. The contractionary policy is used in order to reduce the effect of inflation, as the rate of interest is increased. To sum up the side of monetary policy, let just say that the government policy that influences money, supply of money, circulation of money and availability and cost of credit will be the monetary policy. It must be noted that most with the constituents with the monetary policy are implemented by the central bank. It must be also noted that this policy is a lot more frequently used for economic growth.

Moving on to the fiscal side with the comparison ‘monetary policy vs fiscal policy’?

The fiscal policy is not specifically the contrast with the monetary policy, it truly is just a different policy that is closely associated using the monetary policy with the country. Using the important role that the central bank has to play within the implementation with the monetary policy, the governments aren’t left far behind. The role of governments is extremely important when 1 is studying the the fiscal policy vs monetary policy. The fiscal policy is basically the policy of revenue and expenditure that is adopted by the government. This kind of policy basically affects the welfare and economic development that is implemented by the government. The fiscal policy is used as a tool by the governments to increase or decrease taxes and also increase and decrease expenditure with the government to aid the public needs. The fiscal policy is usually decided by the finance ministry, department of revenue and department of corporate affairs. The fiscal policy thus directly affects the welfare with the people. According to the principles that have been laid down by Keynesian economics, the fiscal policy can be effectively used to stimulate aggregate demands with the common citizens. Taxation and spending with the government formulated according to the needs with the people, and the aggregate demand and supply for common commodities and civic amenities is actually a really good fiscal policy. Democratic governments always frame their fiscal policy ‘for the people’.

To know a lot more about such economic policies, you may possibly also refer to:Classical Economics vs Keynesian EconomicsPrinciple of EconomicsI hope that the explanation of monetary policy vs fiscal policy, proves to be resourceful. You might also undertake a keen study of Keynesian economics to know and ascertain much more facts related to differentiation of monetary policy vs fiscal policy.

Good Luck!

Posted in Eudcation Articles | Comments Off

Microeconomics Vs Macroeconomics

Wednesday, August 3rd, 2011

In a broad sense, microeconomics and macroeconomics are basically the subcategories of economics. Even though they’re different from each other in a number of circumstances, they do depend on each other in terms of a couple of aspects. Nevertheless, you’ll find a lot more differences, than similarities, between the two concepts, and these differences are highlighted within the name itself. Even though microeconomics has the focus on the smaller entities (the consumer and the producer), macroeconomics focuses on the larger entity (the economy). Just before we move on to the microeconomics vs macroeconomics comparison, we need to comprehend each of these individually. Read a lot more on principle of economics.

Microeconomics
In economics, microeconomics will be the branch that deals using the functionality and behavior of individual entities, such as business firms and households. The effect with the functioning and behavior of these individual units on the supply and demand for goods and services is also taken into consideration in this subcategory of economics. Typical questions asked in microeconomics incorporate:How does a consumer take decisions on the consumption of goods and services?How do firms cost their goods and services?It also takes into consideration the decision making power of these individual units. It’s an important tool with the economy as it studies the economic factors, such as the consumer behavior, and provides a picture with the economy.

Macroeconomics
In economics, macroeconomics may be the branch that deals using the functionality and behavior with the entire economy with the nation or the world. This includes concepts like national income, cost level, employment, interest rates, etc. Typical questions asked in macroeconomics incorporate:What are Causes of Inflation?What are the effects of national debt on the economic growth with the nation?However an additional important aspect that macroeconomics takes into consideration may be the influence with the government economic policies on all with the aggregates mentioned above. Though it looks in the economy in a broader perspective, it does assist in studying the conditions with the economy, and facilitates analysis with the very same.

What is Difference Between Microeconomics and Macroeconomics?
Coming back to the microeconomics vs macroeconomics comparison, you’ll find quite a couple of differences between the two concepts. Even though microeconomics stresses on the individual firms and consumer, macroeconomics deals using the entire economy as a single unit. This invariably means that the former takes into consideration the demand and supply with the individual goods and services, although the later takes into consideration the aggregate of demand and supply of all goods and services. However one more point of distinction within the macroeconomics vs microeconomics comparison may be the point with the equilibrium. In microeconomics, the equilibrium occurs when the quantity demanded equals the quantity supplied. In macroeconomics, on the other hand, equilibrium occurs when the aggregate demand equals aggregate supply. To sum it up, microeconomics focuses on the various factors of supply and demand, and the repercussions of these factors on the cost of commodities, even though macroeconomics focuses on the increase inside the economic growth, and the changes within the national income.

More reading on economics:Keynesian EconomicsOligopoly Marketplace StructureClassical Economics vs Keynesian EconomicsEven though you’ll find many points of distinction within the microeconomics vs macroeconomics comparison, each these concepts are dependent on each other to some extent. There do exist some aspects of these concepts which tend to coincide with each other. For example, an increase within the inflation, (macroeconomics), will result in an increase with the cost of raw material, which will in turn result in an increase within the cost of end product (microeconomics). In the end with the day, each microeconomics and macroeconomics are important for sustaining the growth with the economy, whilst maintaining the necessary standard.

Posted in Eudcation Articles | Comments Off

Marginal Rate of Substitution

Wednesday, August 3rd, 2011

Within the subject of microeconomics, the Marginal Rate of Substitution (MRS) can be a quite important concept that economists use for their calculations. This concept has been around since the days with the classical economists, and it’s a tool that is still used in many different fields of calculation.

According to the classical economists, marginal rate of substitution may be the amount of product A that a consumer is willing to give up, in order to obtain an additional unit of product B. The important part of this formulation is that the total utility derived by the consumer for product A and B remains exactly the same. Read far more about the principles of economics.

Marginal Rate of Substitution Example
This concept will become clearer using the aid of an example. Suppose a customer walks into a shop and has $10 to spend. Now with these $10 he can buy 8 loaves of bread and 2 eggs. Assume that 1 loaf of bread costs $1 and 1 egg costs $1. Now if he wants an additional egg, he will have to purchase 1 loaf of bread much less, but this will not affect his utility derived from the total purchase. He is thus sacrificing 1 loaf of bread for an additional egg.

Mathematically speaking, any combination with the amount of product A and product B that the consumer buys will result within the very same amount of total utility derived. This can be represented on an indifference curve, which implies that the consumer will be indifferent if he purchases a lesser amount of product A, in order to get an additional unit of product B.

Importance
The importance with the marginal rate of substitution is that it clarifies that the resources that consumers have at their disposal are limited in nature. This means that the consumer has to create a option between various goods. If he could obtain unlimited amounts of each product, this law would be useless in nature, but this is not feasible or realistic. Thus the concept of opportunity cost also arises in such a study.

Economists use the law of diminishing marginal rate of substitution as a means to study consumer habits and their preferences. The products for which consumers are willing to sacrifice a greater number of alternative products, are a lot more preferable to them. This assists economists study market place trends, and it assists producers adjust the supply and the prices of that particular product.

Marginal Rate of Substitution Calculator
In order to calculate the marginal rate of substitution for a particular product in relation to one more, there can be a specific formula at our disposal. The marginal rate of substitution formula is as follows.

MRS = Change in product A/Change in product B

According to our example, the change within the number of loaves is -1, and the change within the number of eggs is 1. Here it is possible to see how to calculate marginal rate of substitution.

MRS = -1/1 = -1 = 1 (NOTE: The sign is ignored for the sake of convention)

Diminishing marginal rate of substitution exists because with the law of diminishing marginal utility. According to this law, the far more units of a particular product that a consumer purchases, the lesser utility and satisfaction he derives. Thus in our example, the consumer will be much less willing to sacrifice much more units of bread in order to gain a greater amount of eggs.

This is not an exact science and it truly is simply a theoretical way of measuring this phenomenon. In reality, you’ll find hundreds of different factors that play a part in a consumers decision making method, so this formula cannot be relied on in such a simplistic form. Moreover, these reasons will be different for each individual consumer or firm, so it would be impossible to arrive at some standardized type of accurate calculation of marginal rate of substitution.

Also see the following: What’s Marginal UtilityMicroeconomics Vs MacroeconomicsClassical Economics vs Keynesian EconomicsThe importance of marginal rate of substitution is to simple aid economists and producers recognize the concept of opportunity cost. It also assists them realize the dilemma that consumers face when they have to create a option between two different products.

Posted in Eudcation Articles | Comments Off

What exactly is Marginal Propensity to Consume

Wednesday, August 3rd, 2011

You know your raise is due tomorrow. It’s been a year of hard work and you know that the appraisal is lengthy due and nicely deserved. So now that you know that a little much more than usual is going to enter your bank account this month on, I’m sure you’ll have some plans for it? Maybe a party for your friends, something for the house, a cool new gadget perhaps? Maybe, here you would like to spare a thought for your marginal propensity to consume. What exactly is marginal propensity to consume? Read on to find out. Find out about the basic principle of economics.

Marginal Propensity to Consume – Definition

To spend or not to spend? That will be the question. And how significantly you do spend is what the marginal propensity to consume talks about. As the definition with the marginal propensity to consume goes, it really is the increase in consumer spending with an increase in disposable income. Within the first paragraph I highlighted the basic and common situation under which the disposable income with the person increases. Now, whether he chooses to spend it, or perhaps a lot more accurately, how much he chooses to spend is his propensity to consume. And since it has something to do with a slight increase over normal (in this case, the disposable income) the world ‘marginal’ comes into play in this concept, recognized as the marginal propensity to consume.

Marginal Propensity to Consume Calculator

While slightly technical and complicated sources with a lot of Greek alphabets will completely confuse you with this otherwise terribly simple marginal propensity to consume formula, a considerably simpler, easy-to-use version of it truly is given here.

Marginal Propensity to Consume = Change in Consumption (C)/Change in Disposable Income (Y)

So basically, in the event you get a US$ 100 raise, and you spend US$ 80 of it for whatever purpose, then your marginal propensity to consume is

80/100 = 0.8

What this formula does is that it equates two variables, which are central to the concept of marginal propensity to consume – the disposable income and the consumption. The marginal propensity to consume pretty significantly espouses a basic assumption that with an increase in disposable income, there will be an increase in consumption, because nicely, lets face it, not too many people feel encouraged to reduce spending although in the receiving end of an increase in income!

Factors that Affect Marginal Propensity to Consume

Of course, this economic concept is not a stand-alone 1 and comes with a variety of ifs and buts with it. Here are a couple of factors, which affect the marginal propensity to consume.

Recession: After facing a big 1, which has lasted for nearly two years by now, 1 cannot simply overlook the range of impacts of an economic recession. During a recession, the marginal propensity to consume with the people is generally lower, as people choose to hang on to and save every single penny that they can lay their hands on. Conversely, during a period of boom with rising salaries, the marginal propensity to consume will be a lot higher.Monetary Volatility: How stable is your currency? Does the exchange rate fluctuate a lot, whenever you compare it with other currencies? What exactly is the rate of inflation like? May be the GDP showing stable growth over a sustained period of time? Because, if the currency fluctuates a lot and the inflation is pretty high, then the marginal propensity to consume will be relatively lower, as people tend to spend their earnings a lot more prudently.Age with the Sample: It’s widely and perhaps correctly assumed, that the younger lot tends to spend a lot a lot more than the older lot. So, if the sample population you are assuming for testing the marginal propensity to consume concept can be a younger lot, a lot more frequently than not, the marginal propensity to consume is relatively higher.Job Security: Should you work for the government on inside the armed forces, chances are quite high that you may possibly in no way lose your job. And with an employment guarantee, 1 is entitled to feel a bit lax with his or her spending as compared to say someone who has the sword of unemployment dangling correct above his head, ready to fall any time. So for people in a much more secure sort of job, the marginal propensity to consume is higher.

More economics related articles here. Read on.What’s Marginal UtilityDiminishing Marginal UtilityMarginal Rate of SubstitutionSo, this discussion a lot more or much less, puts to rest all your questions about what’s marginal propensity to consume. Marginal propensity to consume is much less of a theory in itself and much more of a basic and widely occurring term in Keynesian economics, in which the macroeconomic situation of a country is studied. It simply lays down the likelihood of spending over saving.

Posted in Eudcation Articles | Comments Off

Open Market Operations

Wednesday, August 3rd, 2011

Even though open industry operation are considered to be the principal tools of a monetary policy, not many people will claim about knowing what it really means. The common man seems to be a lot more comfortable staying ignorant about the economic policies, than trying to figure out what they mean and how they affect him. Within the United States, open market place operations consist of purchasing and selling of previously issued U.S. government securities by the Federal Reserve System (also recognized as Fed). Even though the concept is far more or much less exact same in all of the economies with the world, you may possibly observe some difference within the methods by which it really is carried out. Similarly, the objectives of open industry transactions might differ from 1 economy to an additional.

What are Open Industry Operations?

Open market place operation will be the procedure of implementing a monetary policy by which the central bank controls the total money supply by controlling the term interest rate and the supply of base money within the economy. When it comes to the economy with the United States, this open industry operations definition can be put as trading of government securities inside the open market place. Although purchasing of these securities can facilitate growth within the economy, the sale with the identical does the exact opposite. This purchasing and selling of securities assists in stabilizing the economy. During an inflation, when an excessive amount of of money within the industry affects the value of a dollar, sale of securities assists in taking out the money from the economy and stabilizing it. The targets used in implementation of open market place operations incorporate inflation, interest rates, exchange rates etc. The targets of these operations differ from 1 section to an additional. Essentially the most important goals of open marketplace operations consist of attaining a specific short term interest rate inside the debt markets, growth with the money supply, achieving and maintaining a fixed exchange rate etc.

Open Industry Operations Example

The United States of America and the European Union are two bigwigs with the world economy. Inside the US economy, the Federal Reserve System – the central bank with the US, is responsible for the formulation and implementation of monetary policies. Within the Federal Reserve System, there may be the Federal Open Industry Committee (FOMC) which is supposed to monitor the policy making procedure with the open industry operations. When the Federal Reserve buys securities from a particular dealer, the payment is done by crediting the reserve account with the dealer?s bank at a Federal Reserve Bank. When Federal reserve sells securities to a particular dealer the payment by the dealer assists in reducing reserves with the dealer?s bank too as the monetary system. In Eurozone, the European Central Bank resorts to open industry operations to stabilize the interest rates and manage liquidity within the market place. In Europe, though, it really is a four-tier system which has certain steps which are executed at specified intervals.

Those were the details of what are open marketplace operations and how do they work. Within the United States, one of the most important duty with the Fed is to stabilize the economy by managing the money supply with the nation. In order to do this, the Fed uses three tools of monetary policy. Open markets operation is 1 with the three, even though the other two are discount window borrowing and reserve requirements. In order to maintain stability within the economy, the monetary policy has to be extremely elastic, and these three tools with the policy ensure that it stays elastic.

Posted in Eudcation Articles | Comments Off

Economic Problems

Wednesday, August 3rd, 2011

Within the following paragraphs, the meaning of economic problems and some such problems have been described. The phenomenon of economic problems revolves around numerous dynamic aspects of society. The academia of economics, at the same time as its material behavior, is based around man, society and institutions. The theories that are used to solve economic problems are usually true, but not always. The faster we grasp the fact that economics is an art that revolves around man, the sooner we will be able to have economic peace. Yet another truth that we need to accept is that economic problems are going to be present, always. Also have a read on the economic problems inside the United States.

What is an Economic Dilemma?

In a broad sense, an economic dilemma can be defined as an abnormal and irrational or irrelevant behavior by socio-economic units and marketplace components. An economic issue can be triggered by any case or causes or even yet another economic difficulty. Though there is no scale that measures the level of abnormal behavior, an economic difficulty is said to have arose when the abnormal behavior by economic components tend to affect a number of institutions.

In this discussion, market place components signifies 3 major constituents with the industry, namely, demand, supply and cost. Though the magnitude of all of the three components is small, it plays a highly influential role at a macro level. The term institute defines individuals, organizations, companies, government, governing bodies and any unit which is capable of conducting an economic activity.

Meaning: You will find a number of definitions that elaborate upon an economic dilemma. Even so, the simplest definition that is accepted world wide is that a dilemma is actually a abnormality in economic institutions or constituents that inside the view of society at large has a negative influence on earning and spending. The real gist is thus that a ‘problem’ is really a subjective view with the entire society. Rise in gas cost by 1 cent is not an economic issue, but a rise by $10 is stated to be an economic difficulty.

Scarcity: Classical and neo-classical economists and also their school of though, have presented a quite practical explanation of economic problems, the human wants are unlimited. Even so, the volume of available resources that is used to fulfill them is quite limited. Even the alternatives that are present limited. This combination of limited resources and unlimited wants results into economic problems. This approach is typically termed as the scarcity approach. Thus whenever you try to find the solution to economic problems in Greece or economic problems inside the United States economy or a solution to the global economic crisis, you will have to focus on the point of unlimited wants and limited resources.

List of Economic Problems

Here is small list of some probable economic problems. Note that the list is not totally complete and academic arguments to some elements inside the list are welcome.Anti-competitive behavior, laws and practicesMass bankruptcy filings and insolvenciesEconomic bubbles and mass business failureChild labor and improper child welfare developmentCommercial crimes and intentional or planned corporate offensesCorporate crime and planned economic turmoilCorporate scandalsCorruptionUncontrolled debtEconomic disastersGovernment or bureaucracy induced economic crisisMass economic inequalityEnergy crisesEthically disputed business practices (refer to ethical and unethical practices)Financial crises (restricted to the financial sector)Uneven income distributionInflationMarket failure (component failure)Monetary hegemonyMonopolyOffshoring and outsourcingPoverty (you could also read far more about Poverty in United States)Economic recessionsSocial inequalityStock industry crashes (refer to how does a stock market place crash)UnemploymentMass public affluenzaAbnormal (too lengthy or too short) age stratificationAgflationAsset cost inflationBank runBenefit shortfallBiflationGDP or market place component contractionCredit crunch crisisCrony capitalismCurrency crisisCycle of povertyDeflationDeindustrializationDemographic trapHigh dependency ratioDominant minorityDutch diseaseEconomic collapseEconomic mobilityEconomic stagnationExpenditure cascadesExploitationFinancial contagionFlight-to-liquidityFlight-to-qualityFree rider problemGlass ceilings (refer to women and the glass ceiling)Hahn’s ProblemHorizontal inequalityHyperinflationIncome deficitInnovation butterflyInsider tradingKleptocracyLiquidity crisisMalthusian catastrophe and trapMarket abuseMiddle class squeezeMonetary inflationNational bankruptcyCrude oil depletionOvercapitalisationOverpopulation (refer to overpopulation problems)PandemicPanic sellingPensions crisisPlutocracy (the rule of wealthy, or rather a combination of wealth and power, sufficing reach other)Population declineReal estate bubbleRural flightSocietal collapseSpending waveStagflationState monopoly capitalismStaycation (a time period exactly where a person or a family takes off a non festive, or a non sick leave from work to relax for a day or two)Stock industry bubbleSunshine tax (a significantly lower wage rate in 1 region as a result of excessive tax)Urban decayWaithood (refers to the lengthy time period between the date of completion of education and date of employment inside the lives of many young people )Within the recent past, a considerable number of economic problems have plagued the world’s markets. Here are some explanations.

Inflation: 1 with the greatest problems ever seen inside the developing nations, inflation, involves the rise in cost levels of goods and services. The basic reason that can be pointed out is that the population rise is not proportional and is excessive, in comparison to the available resources. Hence the far more number of people demand a limited number of goods which leads to cost hike. In contrast to this commonly observed theory, inflation is also seen when currency in circulation is increased. Wars, natural disasters other calamities are also accused of inflation. Hyperinflation is extremely, really fast and disproportional inflation. South east Asian economies are of date suffering from this phenomenon.

Economic Bubble: An economic bubble is high trade and industry values of commodities, goods and products, the intrinsic prices of which are quite low. Exactly the same opposite situation may also arise. Real estate bubbles in United States were responsible for a great deal of reduction in economic activities.

Recession: The third prominent economic difficulty is recession, which was severely experienced in 2008. This economic cycle can be a product of many causes, exactly where in industry values, GDP, rate of employment, economic growth stall or fall. This results into credit crunches, fall in rates of employment and over all economic activities. A really prolonged recession is recognized as a depression.

It must be noted that since economics can be a science and art that deals with man, you’ll find a number of economic problems that overlap the scope of other social sciences. The reason being that, the focal point of all these economic problems and other social sciences is mankind.

Posted in Eudcation Articles | Comments Off

Total Variable Cost

Wednesday, August 3rd, 2011

So you’ve just about attended the third lecture of your commerce major and the professor has already moved on to cost and revenue concepts no sooner than he has wrapped up the various economic theories (which are approximately ten in number in the event you are concentrating just on the major theories!). Whew! That’s fast – even for a commerce graduate like me! But then, with each progressing year, the speed of education is gaining added momentum and what used to be taught in two semesters to the previous batches are being covered in just 1 semester these days! So, if your professor has given you an assignment on total variable cost exactly the same day as he took whirlwind session on it, you’ve come to the proper place, dear budding scholar! Let’s get into the details of total variable costs preceded by a short summary on total cost, just for the sake of recollecting the basic premises of cost.

What is Total Cost?
Total cost of production, in terms of economics, refers to the sum total of all economic costs incurred in manufacturing a product. This includes all fixed costs (costs such as rent, electricity bills, utility bills, etc. that have no bearings on and cannot be directly allocated to the production method) that must be incurred irrespective with the volume and quantity of production, variable costs (expenses such as cost of raw materials, spare parts, labor cost, etc. which are incurred for the sole purpose of production and can be directly allocated to the production procedure) and opportunity cost (cost with the next greatest alternative that was given up in favor with the chosen alternative).

In terms of cost accounting, total cost refers to the sum total of fixed and variable costs that are classified under the major elements of cost such as Material, Labor and various Overhead costs. The profit or loss figure is arrived at by calculating the difference between total costs and total sales revenue. A cost sheet is prepared to record such costs and arrive in the profit or loss figure (as the case might be).

What is Total Variable Cost?
The total variable cost may be the sum total of all those costs that change in direct proportion to the change within the quantity or volume of production. Such costs contain cost of raw materials, labor cost, cost of operations, variable overheads, packaging, etc. An increase inside the volume of production results in an increase in variable costs and vice versa.

How to Calculate Total Variable Cost
There are two ways in which you are able to calculate total variable cost. Probably the most elementary way is to add up all variable costs. The other way is to use the following total variable cost formula:-

Total Variable Cost = Total Units of Outputs * Variable Cost Per Unit

You can use this formula to calculate total variable cost only should you have the figure for variable cost per unit. Even so, to calculate variable cost per unit, it is possible to add up all of the variable costs together and use that sum inside the following formula:-

Total Variable Cost Per Unit = Total Variable Cost/Total Units of Output

What can be a Total Variable Cost Curve?
A total variable cost curve will be the graphical representation with the relationship between total variable costs and total outputs with the manufacturing plant for a given period of time. Plotting Variable cost values on the Y-axis and Output Quantity on the X-axis, we can show the marginal returns over a given period of time. Inside the short run, the curve rises steeply showing increased rate of marginal returns on investment. As it progresses, the steepness with the slope with the curve decreases, tending towards a flatter rise. This denotes a decreasing rate of return on each additional unit of output.

Total Variable Cost Calculation: An Illustration
ABC Pvt. Ltd. got an order for 3000 tire tubes to be delivered to J&B Tires Ltd. The various direct/ variable costs involved in producing 3000 tire tubes is as follows:-Raw material – $1000Labor – $800Raw Materials Carriage Cost – $180Therefore, total variable cost = Raw Material Cost + Labor Cost + Carriage Cost = $1000 + $800 + $180 = $1,980.

If you wish to find out the variable cost per unit of out put, you are able to calculate it as follows:-

Variable Cost Per Unit = Total Variable Cost/ Number of units of tire tube = 1, 980/3000 = 0.66.

Now, in the event you wish to calculate the total variable cost using the formula Total Variable Cost = Total Units of Outputs * Variable Cost Per Unit, you are able to do it as follows:-

3000 * 0.66 = 1,980 = Total variable cost as we had previously calculated by adding up all of the direct costs.

Hope that helped you get your concepts clear on total variable cost. This brief tutorial would also allow you to draw up production or job cost sheets for calculating total production costs and determining selling cost by calculating profit as a percentage of cost of production or sales. Nicely, all that is part of advanced cost accounting and I won’t confuse you using the details proper now. Wish you all of the greatest for that oncoming assignment!

Posted in Eudcation Articles | Comments Off

Average Fixed Cost

Wednesday, August 3rd, 2011

The concept of fixed cost in management accounting and economics is really important. Fixed costs are a part of total costs, whilst we discuss about them, we should also be aware of what are the variable costs. If any 1 of these concepts is clear to the students of accounting, then understanding the other would not be a big challenge. So, prior to we get to know how to find average fixed cost and how may be the average fixed cost curve, let us first get ourselves acquainted using the difference between fixed costs and variable costs within the next paragraph.

Difference Between Fixed Costs and Variable Costs

For any product manufacturing company, dealing with fixed costs and variable costs is quite common. Any firm would take a decision on increasing or decreasing its production considering the demand for its products inside the market place. Though the top quality of products of a company might be appreciated by the industry, the demand may possibly not be that high, if the consumption pattern itself has undergone change. Fixed costs are those costs which do not change despite a change inside the levels of production. This means that even if the production changes drastically, whether up or down, the fixed costs will remain exactly the same. Specifically opposite to this will be the concept with the total variable costs which changes using the change in production levels. These costs will generally rise with increased production and go down significantly with a decrease in production levels.

Fixed costs can be quite a burden for a company when it really is not performing properly on the sales front. Low sales mean low revenues and, despite the revenues going down, it has no relief inside the type of fixed costs. It will have to continue spending on such costs and they’re almost unavoidable. The companies which are able to effectively manage fixed cost burden emerge as marketplace leaders and future winners. The average fixed cost and variable cost concepts will become far more clear with good examples with the two. Indirect materials, depreciation on machinery, overtime paid to workers, payroll taxes with the employer or the company, lubricant costs for machines, cost of tools and labor and machine costs are the very best examples of variable costs. On the other hand, depreciation on building, insurance to be paid, rent paid to owner, salary with the manager with the plant, electricity and power expenses and employee payroll and salaries are the examples of fixed costs. Should you wish to plot the average fixed cost curve, then the quantity of products is on the X axis, whereas the cost or cost will be on the Y axis. The average fixed cost curve when plotted systematically, assists us realize the average fixed costs in different situations. Now, having understood the difference between these two types of costs, let us know how to calculate average fixed cost inside the next paragraph.

Computation of Average Fixed Cost

While calculating the average fixed cost in finance and accounting, we take the ratio with the fixed cost of production and the quantity of output produced during a specific period of time. Given below may be the formula for the average fixed cost.

Average fixed cost = Fixed cost of production / Quantity of output produced.

While computing the average fixed costs, you will need the annual reports or the quarterly results of a company, and a calculator. You’ll be able to appear in the account statement and note down the costs which have not changed over the quarters or years. These will be fixed costs. It is possible to add the fixed costs of two successive years and then divide the addition by two which will give you the average fixed cost for that particular period.

The above content on average fixed cost will enable you to to analyze the financial position of a company, and arrive at conclusions, regarding its operational efficiency. So, hoping that you will make use of this details within the appropriate way, I would like to sign off here. All of the very best!

Posted in Eudcation Articles | Comments Off

Average Variable Cost

Wednesday, August 3rd, 2011

Study of variable costs, which are a part with the total costs, is absolutely essential for all product manufacturing firms. The specialty or characteristic of these costs is that they change using the changes in levels of production. Dealing with changing variable costs is actually a challenge for business houses, to maintain their profits. Variable costs are analyzed using the aid with the average variable cost curve, in which we have the quantity produced on the X axis and the cost on the Y axis. From the graphical figure we get to know how the costs change with respect to the cost. Just before knowing much more about the average variable cost function, it’s necessary that we realize the difference between average fixed cost and average variable cost.

How is Variable Cost Different from Fixed Cost

As mentioned above, variable costs will be changing as per the levels of production. So, a lot more the production, a lot more will the company pay for such costs. These costs will be almost equal to zero when the company stops its production or reduces it considerably. Specifically opposite to this may be the concept of fixed costs. The fixed costs are those costs which are paid by the factory owner even if he lowers his production to a great extent. Thus, fixed costs can be quite a burden for upcoming and small business ventures. The comparison between fixed costs and variable costs would be quite easy to realize if we consider some examples of these types of costs. Indirect materials, payroll taxes, overtime paid to employees and workers, lubricant costs for the machines, depreciation on machinery and cost of tools and labor are very best examples of variable costs. On the other hand, rent, insurance payable, electricity, power, depreciation on building and salary with the plant manager would be the fixed cost examples. Now, let us consider the formula for fixed costs just before we move on to the average variable cost formula.

Average fixed cost = Fixed cost of production / Quantity of output produced.

Calculating Average Variable Costs

Calculating the average variable cost is extremely simple, provided you know the correct average variable cost formula. So, let us discuss it below.

Average variable cost = Total variable cost / Quantity of output produced.

We are all aware that the total cost will be the sum of fixed cost and the variable cost. So, naturally, the average total cost will be the sum with the average fixed cost and average variable cost. This has been expressed in terms of a mathematical formula below

Average total cost = Average variable cost + Average fixed cost.

The total variable cost is absolutely nothing but the sum of all those costs which will be changing in a direct proportion to the change inside the quantity or volumes of production. Such costs consist with the cost of operations, raw material costs and labor costs. The total variable cost computation is also easy like that of average variable cost. We calculate it by multiplying the total units of output and the variable cost per unit. This has been expressed inside the type of a mathematical formula below.

Total variable cost = Total units of output x Variable cost per unit.

In the field of economics and accounting, knowledge of average variable cost is really a must. Hoping that you will use this information for fast calculations I would like to sign off here. Good luck!

Posted in Eudcation Articles | Comments Off