My aunt runs a beauty parlour which specialises in providing
Henna design services.
The fixed cost for her shop and equipment which includes space
rental is $200.
The variable costs are costs of hiring henna artist is $100
The first column
shows the number of henna artist and the second column show the quantity of
customers. The third column shows the marginal gain per artist which is the
difference in customers after 1 additional artist. The fourth column shows the
fixed cost which will always remain the same regardless of the number of artist
or customers. The fifth column shows the variable costs of each level of
output. These are calculated by taking the amount of artist hired and
multiplying the salary.
Total cost is calculated by adding fixed cost and variable
Quantity of Customers
Average Fixed Cost
Average Variable Cost
Average Total Cost
As the number rises from one to two artists, customer
increases from 28 to 52, a marginal gain of 24. From that point on, though, the
marginal gain in decreases as each additional artist is added. For example, as
the number of artist rises from 5 to 4, the marginal gain is only 8; and as the
number rises from 6 to 5, the marginal gain is only 6.
Having only 1 artist working, the single artist needs to do
everything from greeting customers to administration and cleaning up. Once a
second or a third artist joins in, the distribution of workload is more even
with allows a greater division of labour. This result in greater increase in
marginal returns. But once more artists are added, the advantage of adding each
artist is less since the specialisation of labour can only go this far and
additional artists will just end up greeting people at the door will have less
impact than the second one did. The diminishing marginal returns. As a result,
the total cost of production will begin to rise more rapidly as output
increases. This pattern of diminishing marginal returns is common in production.
It occurs because, at a given level of fixed costs, each additional input
contributes less and less to overall production.
The ATC curve is a U-shape because there are increasing
marginal costs. At the ATC curve’s minimum point, MC curve intersects the ATC.
This will always be the case if there are increasing marginal costs. Marginal
cost is calculated by dividing the difference in total cost with the difference
in the numbers of customers. For example, the cost difference of hiring 2
artists from 1 artist is $400 – $300 = 100, and the difference in customers is
52 – 28 = 24. Marginal cost is 100/24 = $4.17. In other words, the marginal
cost is factored into the average total cost at every unit. Because of fixed
cost ($200), marginal cost almost always begins below average total cost. When MC
is below ATC, ATC will be decreasing, and when MC is above ATC, ATC will be increasing.
As customer increases, ATC will decrease and MC will increase. Eventually they
intersect, then MC continues to increase and pulls ATC up after it.