Question

Mr Han Cook says that marginal cost is just a funny name for average total cost. What do you think about this idea?

Answer 1

Average total and variable costs measure the average costs of producing some quantity of output, while marginal cost is the additional cost of producing one more unit of output. The marginal cost curve is upward-sloping due to diminishing marginal returns, and there is a point where marginal and average costs meet.

Step-by-step explanation:

Average total and variable costs measure the average costs of producing some quantity of output. Marginal cost is the additional cost of producing one more unit of output. It is not the cost per unit of all units produced, but only the next one (or next few). We calculate marginal cost by taking the change in total cost and dividing it by the change in quantity. For example, as quantity produced increases from 40 to 60 haircuts, total costs rise by 400 - 320, or 80. Thus, the marginal cost for each of those marginal 20 units will be 80/20, or $4 per haircut. The marginal cost curve is generally upward-sloping, because diminishing marginal returns implies that additional units are more costly to produce. We can see small range of increasing marginal returns in the figure as a dip in the marginal cost curve before it starts rising. There is a point at which marginal and average costs meet, as the following Clear it Up feature discusses.

Answer 2

Marginal cost and average total cost are distinct concepts in economics. While average total cost considers the total cost per unit over all production, marginal cost focuses on the additional cost incurred by producing one more unit.

Step-by-step explanation:

Mr. Han Cook's statement conflates two different cost concepts. Average total cost (ATC) is the total cost divided by the quantity produced, providing an average perspective of the cost per unit. On the other hand, marginal cost (MC) refers to the change in total cost resulting from producing one additional unit. Marginal cost helps in understanding the incremental impact on total costs as output changes, offering insights into optimal production levels.

Marginal cost intersects with average total cost at the point where marginal cost equals average total cost—the lowest point of the average total cost curve corresponds to the minimum point of the marginal cost curve in perfect competition. However, this doesn't make them the same; it illustrates a specific relationship between them at a certain production quantity.

Understanding the distinction between these concepts is crucial in economic analysis and decision-making. Marginal cost guides short-term production decisions, especially in scenarios like pricing, where knowing the cost of producing an additional unit can influence optimal pricing strategies. Meanwhile, average total cost provides insights into long-term cost structures and overall efficiency but doesn't account for changes in costs with each additional unit produced.