Cost of Production and Concepts of Revenue

Raw materials, Labor wages, Electricity for production

Variable costs change with production levels. Raw materials, labor wages, and electricity increase with more production, while rent and insurance remain fixed.

Average Revenue, Marginal Revenue

In perfect competition, firms are price takers, so Price = Average Revenue = Marginal Revenue. The firm sells all units at the same market price.

Fixed costs are spread over more units

Since fixed costs remain constant, when production increases, the same fixed cost is divided among more units, making AFC decrease.

True

In the long run, firms can adjust all factors of production including plant size, machinery, and building. Therefore, the distinction between fixed and variable costs disappears.