In economics, there are two main types of costs: marginal cost and average cost. Marginal cost is the change in total cost that arises when a unit of output is added to or subtracted from production. Average cost, on the other hand, is the total cost divided by the number of units produced. In this blog post, we will compare and contrast marginal cost and average cost, and discuss when it is more advantageous to use one over the other. Stay tuned!
What is Marginal Cost?
Marginal cost is the change in total cost that results from a one-unit change in output. In other words, it is the cost of producing one additional unit of output. Marginal cost can be calculated by dividing the change in total cost by the change in output.
- For example, if it costs a total of $100 to produce 10 units of output, then the marginal cost of producing the 11th unit will be $10. Marginal cost is an important concept in economics because it helps to determine the most efficient level of production.
- When Marginal cost is equal to Marginal revenue, firms are said to be operating at the point of diminishing returns. This is because as output increases, Marginal revenue eventually starts to decrease.
- As a result, Marginal cost becomes higher than Marginal revenue and firms begin to lose money. Therefore, it is important for firms to keep a close eye on their Marginal cost in order to ensure that they are operating at a profit.
What is the Average Cost?
- The average cost of a new car in the United States is just over $36,000. That’s a lot of money, but it doesn’t have to be all at once. In fact, the average monthly car payment is only around $530. Of course, the price of a car is only part of the equation.
- You also have to factor in things like fuel costs, insurance, and maintenance. All told, the average driver spends about $9,000 a year on their car. That may seem like a lot, but it’s actually cheaper than many people think.
- When you break it all down, it comes out to less than $800 a month. So while a new car isn’t cheap, it’s certainly not as expensive as some people make it out to be.
Difference between Marginal Cost and Average Cost
Marginal cost is the cost of producing one additional unit of a good or service. The average cost is the total cost divided by the quantity of units produced.
- Marginal cost always equals average cost at the output level where marginal cost intersects the average cost curve.
- The marginal cost falls as output increases and eventually becomes negative when all fixed costs have been covered and economies of scale are present.
- The marginal cost then rises as economies of scale are exhausted. Average cost first falls as output increases due to economies of scale and then begins to rise as diminishing returns set in and marginal costs begin to exceed average costs.
In the long run, all costs are variable, and thus marginal and average costs coincide. That is why marginal cost curves intersect average cost curves at their lowest points in the long run.
Conclusion
Marginal cost is the additional cost of producing one more unit of a good or service. Average cost, on the other hand, is calculated by dividing total costs by the number of units produced. In most cases, marginal cost is less than average cost, meaning that it’s cheaper to produce an additional unit than to produce another unit at the current production level. This difference between marginal and average costs can be important for businesses to understand as they make decisions about pricing and production levels.
