Relationship between total cost and marginal

Marginal cost - Wikipedia

relationship between total cost and marginal

Basically, we are focusing on two relationships: 1. Relation between Average Cost and Marginal Cost, and 2. Relation between Total Cost and Marginal Cost. For example, average cost (AC), also called average total cost, is the total The relationship between average and marginal cost can be easily. The important conclusion is that marginal cost is not related to fixed costs.

If the marginal cost is higher than the price, it would not be profitable to produce it. So the production will be carried out until the marginal cost is equal to the sale price. In other words, firms refuse to sell if the marginal cost is greater than the market price. Thus if fixed cost were to double, the cost of MC would not be affected, and consequently, the profit-maximizing quantity and price would not change.

relationship between total cost and marginal

This can be illustrated by graphing the short run total cost curve and the short-run variable cost curve. The shapes of the curves are identical. Each curve initially increases at a decreasing rate, reaches an inflection point, then increases at an increasing rate. The distance of the origin of the SRTC above the origin represents the fixed cost — the vertical distance between the curves.

This distance remains constant as the quantity produced, Q, increases. Private versus social marginal cost[ edit ] Main article: Social cost Of great importance in the theory of marginal cost is the distinction between the marginal private and social costs.

The marginal private cost shows the cost associated to the firm in question.

relationship between total cost and marginal

It is the marginal private cost that is used by business decision makers in their profit maximization goals. Marginal social cost is similar to private cost in that it includes the cost of private enterprise but also any other cost or offsetting benefit to society to parties having no direct association with purchase or sale of the product.

It incorporates all negative and positive externalitiesof both production and consumption. Examples might include a social cost from air pollution affecting third parties or a social benefit from flu shots protecting others from infection.

Externalities are costs or benefits that are not borne by the parties to the economic transaction. A producer may, for example, pollute the environment, and others may bear those costs. A consumer may consume a good which produces benefits for society, such as education; because the individual does not receive all of the benefits, he may consume less than efficiency would suggest.

Marginal Cost class Xll Economics

Alternatively, an individual may be a smoker or alcoholic and impose costs on others. In these cases, production or consumption of the good in question may differ from the optimum level. Negative externalities of production[ edit ] Negative Externalities of Production Much of the time, private and social costs do not diverge from one another, but at times social costs may be either greater or less than private costs.

relationship between total cost and marginal

When marginal social costs of production are greater than that of the private cost function, we see the occurrence of a negative externality of production. Productive processes that result in pollution are a textbook example of production that creates negative externalities.

Relation between Average, Marginal and Total Cost | Production | Microeconomics

A certain amount of inequality in the income distribution is to be expected because resources are never equally distributed. Some labor is naturally going to be more productive--better able to produce the stuff that consumers want--and thus get more income. The same is true for capital, land, entrepreneurship. However, without government intervention, an unequal distribution of income tends to perpetuate itself.

Marginal Cost & Average Total Cost - Fundamental Finance

Those who have more income, can invest in additional productive resources, and thus can add even more to their income. A mathematical connection between marginal cost and total cost stating that marginal cost IS the slope of the total cost curve. This relation between total cost and marginal cost is also seen with total variable cost.

The slope of the total variable cost curve is marginal cost, as well. The relation between total cost and marginal cost is but another in the long line of applications of the total-marginal relation.

Total Cost and Marginal Cost The slope of the total cost curve and total variable cost curve is marginal cost.

Relation between Average, Marginal and Total Cost | Production | Microeconomics

As such, if the total cost curve has a positive slope that is, is upward slopingthen marginal cost is positive. Moreover, if the total cost curve has a positive and increasingly steeper slope, then the marginal cost is positive and rising. If the total cost curve has a positive and increasingly flatter slope, then the marginal cost is positive but falling.

This particular total-marginal relation applies to both total cost and total variable cost. Because not only is marginal cost the slope of the total cost curve, it is also the slope of the total variable cost curve.

relationship between total cost and marginal

The reason is that any changes in total cost resulting from changing output is matched by changes in total variable cost.