What is the difference between average cost and marginal cost?
There is a difference between average cost and marginal cost. The average cost of a product is the total cost of making a product divided by the total number of products made. If a company produces 500 hats and spends 3000 dollars to make the hats, the average cost of each hat is 3000 divided by 500 which is 6 dollars per hat. Marginal cost is change in total costs which occur when an additional unit of the product is made by the company. Using the example above, if the company making hats decides to make 501 hats instead of 500 hats, and the total cost for 501 hats is 3050 dollars, the marginal cost would be 50 dollars for the 501st hat produced. Since 500 hats costs 3000 dollars and 501 hats costs 3050 dollars, the marginal cost is the additional 50 dollars spent to make one additional hat. There is a difference between average cost and marginal cost.
Average cost of a commodity is simply the total cost of production of n units divided by the number of units, i.e. 'n'. In other words, it is the cost of production of one unit.
Marginal cost of a commodity is the cost of production of an incremental unit.
Average cost is also defined as the sum of average fixed cost and average variable cost.
If fixed cost is represented as FC, variable cost as VC, total cost as TC and the number of quantities produced as Q,
then average cost, AC = TC/Q = (FC+VC)/Q
whereas, Marginal cost, MC = change in VC/change in Q (or incremental cost)
For example, if 4 phones are produced at a cost of $100 and 5 phones are produced at $130,
then average cost = $100/4 = $25
and marginal cost = $130-$100 = $30.
Hope this helps.
Average cost or unit cost can be calculated by taking the total cost divided by the number of products or quantity. It refers to how much it generally cost to produce a single product by distributing the total cost equally among all the products. It is important to point out that the total cost is obtained by summing up the fixed cost and variable costs. If this result is divided by the quantity then the result should be the average cost.
Marginal cost refers to the cost incurred by producing the next product unit. All additional cost that are incurred in the production of this extra unit will refer to the marginal cost. Differentiating total costs with respect to quantity as mentioned by William1941 should result in the marginal cost.
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.
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.
The average cost is the total cost divided by the number of goods produced. So it is cost per unit. It is also equal to the sum total of the average variable costs and average fixed costs. Average cost can be influenced by the time period for production (increasing production may be expensive or impossible in the short run). Average costs are the driving factor of supply and demand within a market.
Average Cost = (Total Fixed Cost + Total Variable Costs)/Quantity Produced
Marginal cost is the change in the total cost when the quantity produced changes by one unit. So it is the addition made to the total cost by producing one additional unit of output.
Marginal Cost = Total cost of nth unit - Total cost of (n-1)th unit.
Marginal cost can also be defined as the change in total cost (∆TC) due to change in quantity demanded(∆Q).
Marginal cost includes all of the costs that vary with the level of production. Marginal cost is not related to fixed costs.
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.