Explain the relationship among average total cost marginal and variable costs

Marginal cost - Wikipedia

explain the relationship among average total cost marginal and variable costs

Before we explain, the relation of average variable cost (AVC) and average total to marginal cost (MC), it seems necessary that the various types of costs and. Total cost is the sum of fixed and variable costs. Variable costs . Relationship Between Average and Marginal Cost. Average cost and In economics, “short run” and “long run” are not broadly defined as a rest of time. Rather, they are unique. Review: Marginal cost (MC) is the cost of producing an extra unit of output. Review: Average variable cost (AVC) is the cost of labor per unit of output produced. When MC is below AVC, unit costs less than the average, it must be pulling the.

Remember, the average cost, the average fixed and the average variable and the average total cost, these are each of those costs divided by the total amount of juice that I'm producing. You can kind of view them as the cost per gallon. So that we're thinking of the average fixed cost per gallon, so what we're going to do, so I'm writing equal to let Excel know that I'm doing a formula now, this is going to be equal to my fixed cost divided by, so divided by, divided by my gallons, and you can see that's G8 divided by F8, and actually, I guess you can't see my Gs and Fs, but this is the 8th row.

explain the relationship among average total cost marginal and variable costs

If I want my average variable costs, that's going to be my variable costs divided by, divided by my total number of gallons, so that's 50 cents, so that's the first 1, gallons to produce the orange juice, the orange juice for That includes the transportation cost. Then the total is just the sum of these two things.

Or, we could have done it another way. We could have taken this right We could have said that this is just equal to, this is just equal to our total cost, our total cost divided by the total number of gallons.

Diagrams of Cost Curves | Economics Help

Either way, you'll get the same thing, and maybe I'll do a video mathematically on why that is, or maybe you should explore that yourself. Now, the marginal cost. This is equal to our change in cost, our change in total cost divided by our change in gallons of juice. Our change in total costs is going to be 1, minus 1, That's our change in total cost divided by our change in gallons, divided by 1, minus 0, our change in gallons, and that give us 50 cents.

Now, this is the fun thing about spreadsheets, one of the many fun things of spreadsheets, is now I can select all of these and fill in all of the things below it.

Marginal cost and average total cost

They will use the same relative calculations. I'm going to fill without formatting. Now, what was neat here, and I already set up this chart ahead of time, is to plot these things right over here, and so we see what's going on. This is a plot that we looked at in the last video, when we thought about software developers. This was our fixed cost, our variable costs go up as we produce more and more. What we've done here is we've plotted all of this stuff.

The average fixed costs, or actually the marginal costs, the average variable costs and the average total costs.

  • Diagrams of Cost Curves
  • What is the Relationship between Average Cost and Marginal Cost?
  • Marginal cost

I haven't plotted the average fixed cost here, but it's really just the difference between the total and the variable costs. Now, let's think about what's happening. First, let's look at the average, the marginal.

What is the Relationship between Average Cost and Marginal Cost?

Actually, let's look at the marginal costs first, because this is interesting, and this kind of goes in with this narrative of at first, those first oranges that we bought were expensive. We weren't a major producer, but incrementally, incrementally, as we produce those next oranges, so as we go from 1, oranges, as we go from the oranges needed for 1, gallons to the oranges needed for 2, gallons, all of a sudden, our marginal cost went down. We're now a bigger buyer.

explain the relationship among average total cost marginal and variable costs

We can now, those incremental oranges are now cheaper to us. For this generic case, minimum average cost occurs at the point where average cost and marginal cost are equal when plotted, the marginal cost curve intersects the average cost curve from below ; this point will not be at the minimum for marginal cost if fixed costs are greater than 0.

Perfectly competitive supply curve[ edit ] The portion of the marginal cost curve above its intersection with the average variable cost curve is the supply curve for a firm operating in a perfectly competitive market. For example, while a monopoly "has" an MC curve it does not have a supply curve. In a perfectly competitive market, a supply curve shows the quantity a seller's willing and able to supply at each price — for each price, there is a unique quantity that would be supplied.

The one-to-one relationship simply is absent in the case of a monopoly. With a monopoly, there could be an infinite number of prices associated with a given quantity. It all depends on the shape and position of the demand curve and its accompanying marginal revenue curve. Decisions taken based on marginal costs[ edit ] In perfectly competitive markets, firms decide the quantity to be produced based on marginal costs and sale price. If the sale price is higher than the marginal cost, then they supply the unit and sell it.

If the marginal cost is higher than the price, it would not be profitable to produce it.

explain the relationship among average total cost marginal and variable costs

So the production will be carried out until the marginal cost is equal to the sale price. In other words, firms refuse to sell if the marginal cost is greater than the market price.

Thus if fixed cost were to double, the cost of MC would not be affected, and consequently, the profit-maximizing quantity and price would not change. This can be illustrated by graphing the short run total cost curve and the short-run variable cost curve.

The shapes of the curves are identical. Each curve initially increases at a decreasing rate, reaches an inflection point, then increases at an increasing rate.

explain the relationship among average total cost marginal and variable costs

The distance of the origin of the SRTC above the origin represents the fixed cost — the vertical distance between the curves. This distance remains constant as the quantity produced, Q, increases. Private versus social marginal cost[ edit ] Main article: Social cost Of great importance in the theory of marginal cost is the distinction between the marginal private and social costs. The marginal private cost shows the cost associated to the firm in question. It is the marginal private cost that is used by business decision makers in their profit maximization goals.

Marginal social cost is similar to private cost in that it includes the cost of private enterprise but also any other cost or offsetting benefit to society to parties having no direct association with purchase or sale of the product.

It incorporates all negative and positive externalitiesof both production and consumption.