Evaluate the total cost and marginal cost

Reference no: EM13679237

Total variable cost (TVC) is cost that varies with the level of output. Total fixed cost (TFC) is cost that does not vary with output. Total cost (TC) is the sum of total variable cost and total fixed cost:

TVC+TFC=TC

Marginal and Average Costs

Marginal and average cost curves, which will play an important role in the analysis of the firm, can be derived from the total cost curve. Marginal cost shows the additional cost of each additional unit of output a firm produces. This is a specific application of the general concept of marginal cost presented earlier. Given the marginal decision rule's focus on evaluating choices at the margin, the marginal cost curve takes on enormous importance in the analysis of a firm's choices. The second curve we shall derive shows the firm's average total cost at each level of output.Average total cost (ATC) is total cost divided by quantity; it is the firm's total cost per unit of output:

ATC=TC/Q

We shall also discuss average variable costs (AVC), which is the firm's variable cost per unit of output; it is total variable cost divided by quantity:

AVC=TVC/Q

We are still assessing the choices facing the firm in the short run, so we assume that at least one factor of production is fixed. Finally, we will discuss average fixed cost (AFC), which is total fixed cost divided by quantity:

AFC=TFC/Q

Marginal cost (MC) is the amount by which total cost rises with an additional unit of output. It is the ratio of the change in total cost to the change in the quantity of output:

MC=ΔTC/ΔQ

It equals the slope of the total cost curve. "Total Cost and Marginal Cost" shows the same total cost curve that was presented in "From Variable Cost to Total Cost". This time the slopes of the total cost curve are shown; these slopes equal the marginal cost of each additional unit of output. For example, increasing output from 6 to 7 units (ΔQ=1 ) increases total cost from $480 to $500 (ΔTC=$20 ). The seventh unit thus has a marginal cost of $20 (ΔTC/ΔQ=$20/1=$20 ). Marginal cost falls over the range of increasing marginal returns and rises over the range of diminishing marginal returns.

Reference no: EM13679237

Questions Cloud

Investigates the extent of managerial control : Design a research project that investigates the extent of managerial control

Does the resulting scheme satisfy perfect secrecy : Consider the one time pad encryption scheme to encrypt a 1-bit message m with a 1-bit key k. Replace the XOR operation with another operation X. For which X(m,k) does the resulting scheme satisfy perfect secrecy?

The sociological imagination for a society and its citizens : The Sociological Imagination for a society and its citizens

Trade environment of the americas in the nafta period : Has trade among the partners increased or decreased since the inception of NAFTA? Has the change in trade been equally distributed or skewed? Support your answer quantitatively.

Evaluate the total cost and marginal cost : Marginal cost falls over the range of increasing marginal returns and rises over the range of diminishing marginal returns - discuss average variable costs

Augustus caesar : Write an essay on Augustus Caesar

Discuss costs of quality as they apply in your organisation : Discuss the costs of quality as they apply in your chosen organisation. How are quality problems diagnosed? How could the company improve their approach to quality management? Does the organisation have a formal quality system? Would this be appro..

Conflict-management techniques : Conflict-management techniques allow leaders to control conflict levels (not only decrease them, but also increase them). Select a problem that disturbs you and is not solved. The problem can address any environment-your workplace, your community, ..

Produce a risk matrix and risk register for the risks : Read the erp risk case and produce a risk matrix and risk register for the risks outlined in the article.

User Account

All Pages