Average and Marginal Costs
Average cost is the cost per unit of output. It is calculated by dividing total cost with the number of units of output produced, For example if cost of production of 10 units of output is $100, then average cost is = $10.
Average cost is of two types viz. (1) Average fixed cost, (2) Average variable cost.
Average fixed cost
It is the total fixed cost divided by the number of units of output produced, It progressively declines as output goes on increasing in short-run. In Fig-3, the AFC curve slopes downwards to the right. As output rises the AFC approaches the x-axis, but would never touch the x-axis. The AFC takes the shape of a rectangular hyperbola.
Average Variable cost
It is the total variable cost divided by the number of units of output produced. It first falls and after reaching a minimum point rises. It is calculated by dividing total variable cost by the output.
The short-run average cost (SAC) is calculated by adding average fixed cost with average variable cost.
Short-run average (SAC) = Average fixed cost+ Average variable cost
Or
SAC = Total Cost/ No of units of output produced
Marginal cost
The addition made to the cost by producing one more unit of output is known as marginal cost. Thus
MC =ΔTC/ΔQ
Where ΔQ = Change in output
ΔTC= Change in total cost
MC= Marginal cost
If the total cost of producing 10 units of output is 100 and that of 11 units is 105, then marginal cost of 11th unit of output is 5. Here ΔTC= 105-100= 5 and ΔQ = 11-10=1. Thus
MC = ΔTC/ΔQ = 5/1 = 1
Another way to find out MC is total cost of producing n units instead of n-1. That means, MC= TCn – TCn–1
Where n is any real number and in the above example n=11 and n-1 = 10. So TC of 11 units of output minus total cost of producing 10 units of output is equal to 5 and that is the marginal cost.
