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,

\(\text{TC} = \sum \text{MC}\)

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