Economics » Theory of Costs and Revenue » The Concept of Cost

# Average and Marginal Cost

## Average Cost

This is the total cost per unit of output produced. It is the total cost divided by the quantity of output produced (Q). Thus,

$$\text{AC} = \cfrac{\text{TC}}{\text{Q}}$$

Average cost may also be expressed as the sum of the average fixed cost and the average variable cost. Thus,

$$\text{TC = TFC + TVC}$$

$$\text{AC} = \cfrac{\text{TC}}{\text{Q}}$$

$$= \cfrac{\text{TFC}}{\text{Q}} + \cfrac{\text{TVC}}{\text{Q}}$$

$$= \text{AFC + AVC}$$

If AVC = 0, then, AC will reduce to AFC only.

### Average Fixed Cost:

This is the total fixed cost per unit of output produced. It is expressed as the TFC divided by the quantity of output produced (Q).

$$\text{AFC} = \cfrac{\text{TFC}}{\text{Q}}$$

### Average Variable Cost:

This is the total variable cost per unit of output produced. It is expressed as the TVC divided by the quantity of output produced (Q).

$$\text{AVC} = \cfrac{\text{TVC}}{\text{Q}}$$

## Marginal Cost

Marginal Cost (MC) is the change in Total Cost (TC) as a result of a unit change in output. It is generally defined as the addition to TC resulting from an additional unit of output produced. It is measured as:

$$\text{MC} = \cfrac{\Delta \text{TC}}{\Delta \text{Q}}$$

where $$\Delta \text{TC}$$ means change in total cost (i.e. new TC minus old TC) and $$\Delta \text{Q}$$ means change in the quantity of output (i.e. new Q minus old Q).  The sum of MCs up to a given level of output gives the TC of that level of output. Thus,

$$\text{TC} = \sum \text{MC}$$