Question

Speedily tell me what you know and found interesting about Average and Marginal Costs. Gives some example of each of you concept. Conclude your thought with and question.

Answer 1

Average cost is the per unit cost of total production cost of a certain number of units produced. It is the cost per unit of output.

Marginal cost is the cost incurred to produce one more unit of the good.

Suppose, to produce a good, a manufacturer invests 100 on land and 100 on plant and machinery. Then, he uses labour to produce the good and pays wages at 5 for every good produced till 100 units and pays wages at 8 for every good produced in excess of 100 units.

Let us assume that in the starting month, the manufacturer gets 200 units produced.

The total cost incurred by the manufacturer to produce 200 units is

100(land)+ 100( plant and machinery)+ 5*100(1st 100 units' wages)+ 8*100(next 100 units labour wages) = 1500

Therefore the average cost is 1500/200= 7.5

By definition, the marginal cost to produce the 201st unit, if produced will be 8, other things remaining same.

The marginal cost of producing the (say) 64th unit was 5

The marginal cost does not include the fixed cost of initial investment on land and plant and machinery.