The increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for.
Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses). In companies where average costs are fairly constant, marginal cost is usually equal to average cost. However, in industries that require heavy capital investment (automobile plants, airlines, mines) and have high average costs, it is comparatively very low. The concept of marginal cost is critically important in resource allocation because, for optimum results, management must concentrate its resources where the excess of marginal revenue over the marginal cost is maximum. Also called choice cost, differential cost, or incremental cost.
Average Cost
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q). Average costs may be dependent on the time period considered (increasing production may be expensive or impossible in the short term, for example). Average costs affect the supply curve and are a fundamental component of supply and demand.
Total Cost
In economics, and cost accounting, total cost (TC) describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as buildings and machinery. Total cost in economics includes the total opportunity cost of each factor of production as part of its fixed or variable costs.
The rate at which total cost changes as the amount produced changes is called marginal cost. This is also known as the marginal unit variable cost.
The cost curves best tells us the relationship between the marginal cost and average total cost. The average fixed cost (AFC) curve will decline as additional units are produced, and continue to decline.
Characteristics of Perfectly Competitive Market: Free entry / exit (no barriers to entry) Firms produce homogenous products There is perfect knowledge of the market Many Seller and Buyers Seller is a passive price taker Marginal Revenue Curve = Average Revenue = Price = Demand Curve for individual firm. The curve is constant Marginal Cost Curve intersects both Average Variable Cost and Average Total Cost curves at their minimum point Profit Maximisation output level is when MR = MC (find intersect point and draw line down to Q axis)
explain the difference between total utility and marginal utility
When average total cost curve is falling it is necessarily above the marginal cost curve. If the average total cost curve is rising, it is necessarily below the marginal cost curve.
as a marginal cost is the cost of the next product produced, if this is less than average cost, when you continue to produce more products the lower marginal cost will have an affect on the average and cause it to fall.
The cost curves best tells us the relationship between the marginal cost and average total cost. The average fixed cost (AFC) curve will decline as additional units are produced, and continue to decline.
Margianal cost curve crosses the average total cost curve at the lowest point on the average total cost curve to be socially and ecomonical efficient.
Characteristics of Perfectly Competitive Market: Free entry / exit (no barriers to entry) Firms produce homogenous products There is perfect knowledge of the market Many Seller and Buyers Seller is a passive price taker Marginal Revenue Curve = Average Revenue = Price = Demand Curve for individual firm. The curve is constant Marginal Cost Curve intersects both Average Variable Cost and Average Total Cost curves at their minimum point Profit Maximisation output level is when MR = MC (find intersect point and draw line down to Q axis)
explain the difference between total utility and marginal utility
Average Product = (Total Product) / (Labor) Marginal Product(2) = (Total Product)(2) - (Total Product)(1)
When average total cost curve is falling it is necessarily above the marginal cost curve. If the average total cost curve is rising, it is necessarily below the marginal cost curve.
as a marginal cost is the cost of the next product produced, if this is less than average cost, when you continue to produce more products the lower marginal cost will have an affect on the average and cause it to fall.
The marginal cost of an additional unit of output is the cost of the additional inputs needed to produce that output. More formally, the marginal cost is the derivative of total production costs with respect to the level of output. Marginal cost and average cost can differ greatly. For example, suppose it costs $1000 to produce 100 units and $1020 to produce 101 units. The average cost per unit is $10, but the marginal cost of the 101st unit is $20 The Econ Model applications Perfect Competition and Monopoly emphasize the roles of average cost and marginal cost curves. The short movie Derive a Supply Curve (40 seconds) shows an excerpt from the Perfect Competition presentation that derives a supply curve from profit maximizing behavior and a marginal cost curve.
how diminishing returns influences the shapes of the variable-cost and total-cost curves
Negative
price = marginal revenue. marginal revenue > average revenue. price > marginal cost. total revenue > marginal co
Find (i) the marginal and (2) the average cost functions for the following total cost function. Calculate them at Q = 4 and Q = 6.