Marginal cost, Managerial Economics

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Marginal Cost

This is the increase in total cost resulting from the production of an extra unit of output.  Thus, if TC is the total cost of producing n units of output and TCn-1  is the total cost of producing  n-1  units of output, then the marginal cost of producing the  'nth' of unit of output is calculated as:

     Marginal Cost = TCn  - TCn-1

   It will be observed that since fixed costs are fixed, it follows that:

  Marginal Cost = VC - VCn-1

Marginal Cost intersects the Average Total Cost at its lowest.   The MC is related to the AVC in the sense that when MC is below AVC, the AVC must declining with output.  When  MC is equal to AVC, the AC is at its  minimum.  When MC is above AVC, then Average Cost must be rising.  The AFC curve falls continuously and is asymptotic to both axes.  The AVC curve falls reaches a minimum, thereafter rises.  At its minimum, it's equal to MC.

As AFC curve approaches the horizontal axis asymptotically, then AVC approaches the ATC asymptotically.  ATC first declines, reaches a minimum then rises thereafter. At its minimum it is equal to the MC.

Thus, the Short Run Equilibrium Output of the firm is defined as that output at which AC is at its minimum i.e. when the cost of both inputs per unit of a product is smallest.  That level of output will be defined as the most efficient output of that particular plant because the plant is used efficiently.


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