Marginal Cost

Marginal cost is the change in total cost when additional unit of output is produced.

As said by Ferguson “Marginal cost is the addition to total cost due to the addition of one unit of output.”

Symbolically,

MC_n = TC_n – TC_n-1 OR

MC = Change in total cost / Change in output

MC_n = Marginal cost of ‘n’ units of output

TCn = Total cost of ‘n’ units of output

TC_n-1 = Total cost of ‘n-1’ units of output

Tabular representation of calculating MC

Units of Output	Total Fixed        Cost	Total  Variable         Cost	Total Cost	Marginal Cost
0 1 2 3 4 5 6 7 8	10 10 10 10 10 10 10 10 10	0 10 18 24 28 32 38 46 62	10 20 28 34 38 42 48 56 72	- 10 8 6 4 4 6 8 16

Average Cost Curves

Average Cost is the cost per unit of output produced. It is also called unit cost of production.

Average cost = Total cost / Output

AC = TC / Q

Calculating AC when Total Cost is given

Units of Output	Total Cost	AC = TC/ Q
0 1 2 3 4 5 6	10 20 28 34 38 42 48	∞ 20 14 11.3 9.5 8.4 8

Corresponding to three types of total cost in the short run, there are three types of average cost:

1) Average Fixed cost

2) Average Variable cost

3) Average total cost

Average Total Cost is the sum total of average Fixed cost and average variable cost.i.e.

AC = AFC + AVC

Short Run Costs

Short run is the period of time during which some factors are fixed and some are variable.

Short run costs are divided into two components:

1) Fixed costs

2) Variable costs

Total Cost = Total fixed cost + Total variable cost

i.e. TC = TFC + TVC

Fixed Cost :

Fixed costs are the sum total of expenditure incurred by the producer on the purchase or hiring of fixed factors of production.

These are also called supplementary costs  or overhead costs or  indirect costs.

These costs do not change with the change of output, even when output is zero, fixed cost remains the same.

For example: In a shoes manufacturing firm, a machine is installed as a fixed factor.

If it can make 10 pair of shoes a day and that the cost of hiring the machine is Rs. 100 per day.

So Rs. 100 per day is the fixed cost that the producer has to incur even when no shoes is made in a day.

The fixed cost would remain Rs. 100 (between 0 to 10 shoes a day).

Law of Variable Proportion

The law of variable proportion states that as more and more units of variable factors are applied to the given quantity of a fixed factor, the total product may increase at an increasing rate initially, but eventually it will increase at a diminishing rate.

Explaining the above law by taking an example:

A farmer is producing wheat, he has land as a fixed factor and labour as a variable factor.

Since land is a fixed factor, he can produce more of wheat only by using more and more of labour.

Will every additional unit of labour employed on the given land yield the same amount of additional output of wheat?

No, it can never happen. If MP (marginal product/additional output) of labour was to remain constant, then a country like India would have produced more and more of wheat using more and more of labour on the same piece of land. It would have never faced the problem of food.

So MP eventually dimnish.This is due to the fact that, there is some ideal ratio of factors of production.