What is the difference between average cost and marginal cost?
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The average cost is the total cost of production of x units of the product divided by x. Marginal cost refers to the additional amount required to produce the x+1th unit. This does not have to be the average of the cost of x units.
For example if a company can produce 1000 products a day for $5000, the average cost is $5. But to make 1001 products per day it may not be possible to do the same with the machinery they have, instead they may need to buy additional machinery. If this makes the cost of producing 1001 products $5020, the marginal cost of the 1001th product is $20.
It is the first derivative of total cost with respect to the quantity. This makes marginal cost independent of the fixed cost and dependent only on the function of the variable cost.
average cost is the cost of producing a certain amount of output divided by the cost per unit or number of units which have been produced.
when a firm increases its output by one unit, there is a change in the total cost of producing that commodity, this change in cost is known as marginal cost.
The average cost is evaluated dividing the total cost by the produced quantity, while the marginal cost expresses the incremental cost of last item produced.
The total cost is evaluated adding the variable cost to the fixed cost. If the total cost is divided by the amount of output, then the average cost is obtained.The average cost represents a measure of efficiency gained when changing factors of production.
Since the marginal cost does not comprise the fixed costs, the average cost will be greater than the marginal cost if the quantity produced is small. The relation between the average cost and marginal cost varies with the quantity of items produced. Hence, if the quantity increases, the marginal cost increases, while the average total cost decreases. The marginal cost curve intersects the average cost curve at the minimum point.
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