Marginal and average costs

What else might total product (TP) be referred to as?

Total output

Marginal cost (MC) formula

Change in total cost (∆TC) / Change in total product (∆TP)

Average total cost (ATC) formula

• Total cost (TC) / Total output (TQ)

• Average fixed cost (AFC) + Average variable cost (AVC)

Describe the average total cost curve

• Initially decreases but after ATC = MC, it eventually increases due to diminishing marginal returns

• Furthermore, ATC is minimised when ATC = MC because beyond this quantity, MP will continue to increase and drag ATC up with it

Describe the marginal cost curve

Initially decreases but eventually increases due to diminishing marginal returns

Analyse why marginal cost might initially decrease

• Because initially employing inexperienced workers will allow them to specialise, increasing labour productivity, partially decreasing the additional cost in employing an extra worker

• Additionally, initially employing extra workers to underutilised (fixed) machines will allow them to efficiently produce extra output, increasing labour productivity, partially decreasing the additional cost in employing an extra worker

• The effect of increasing returns to labour

Analyse why marginal cost will eventually increase

• Because eventually employing extra workers to fully utilised (fixed) machines will prevent them from efficiently producing extra output, decreasing labour productivity, marginally increasing the additional cost in employing an extra worker

• The effect of diminishing marginal returns