The average cost is the total cost divided by the number of units It is important to understand that firms maximize profits by considering the marginal cost, not the average cost.  between the average cost and the sales price does determine the profits per unit once the profit maximizing quantity is determined, but the profit maximizing quantity generally does not maximize profits per unit. Monopoly emphasize the roles of average cost and Interactive presentations of the most important models in microeconomics and macroeconomics go beyond anything appearing in a printed-on-paper textbook. Learn to think like an economist. Federal Funds (Fed Funds) Rate Gross Domestic Product (GDP) Theory of the Consumer Theory of the Firm MC = TCn – TC1thth MC = TCn – TCn-1 AC = TC/ Q Putting the above table in the form of a graph would give Relationship between Marginal Cost and Average Total CostTotal cost is variable cost and fixed cost combined.

Now divide total cost by quantity of output to get average total cost. Average total cost can be very handy for firms to compare efficiency at different output or when adjusting different factors of production. Marginal cost is a concept that's a bit harder for people grasp. The "margin" is the end or the last. The marginal unit is the last unit. ac units for a garageThink of marginal cost as the cost of the last unit, or what it costs to produce one more unit. ac unit heater not workingIt's hard to find exactly what the cost of the last unit is, but it's not hard to find the average cost of a group of a few more units. ac unit is covered in iceTo find this, simply take the change in costs from a previous level divided by the change in quantity from the previous level.

Take a look at the table below to see how marginal cost was computed. For example, the marginal cost when the quantity is 56 is $2.82. This was computed by taking TC at 55.90Q ($350) minus TC at 38.16Q ($300) divided by 55.9Q minus 38.16Q (17.74Q). Take a look at the graph. You'll notice that the ATC curve is a U-shape. This is always the case if there are increasing marginal costs. You'll also notice that the MC curve intersects the ATC curve at the ATC curve's minimum point. This will always be the case if there are increasing marginal costs. A helpful way to think of this is to imagine that the MC curve is graphing your semester GPA (grade point average) and that the ATC curve is graphing your cumulative GPA. Perhaps you transfered to a harder school. You previously had a high cumulative GPA but your semester GPA starts to pull it down. As you improve your grades each semester your cumulative and semester GPA will meet. After that, if you continue to improve, your semester GPA will pull up your cumulative GPA again.

In other words, the marginal cost is factored into the average total cost at every unit. Because of fixed cost, marginal cost almost always begins below average total cost. As quantity increases, ATC will decrease and MC will increase. Eventually they intersect, then MC continues to increase and pulls ATC up after it. A firm's marginal cost curve also acts as its supply curve. Read The Supply Curve article to get a more detailed explaination of why this is so. September 2016 bookings at Shawnee County Jail Best of Topeka 2016: View all the winners' stories, photos, videos and more here Best of Topeka magazine United Way Annual MeetingChapter 1 - 5 Chapter 6 - 10 Chapter 11 - 15 Chapter 16 - 17 The short-run marginal cost (MC) curve will at first decline and then will go up at some point, and will intersect the average total cost and average variable cost curves at their minimum points. The average variable cost (AVC) curve will go down (but will not be as steep as the marginal cost), and then go up.

This will not go up as fast as the marginal cost curve. The average fixed cost (AFC) curve will decline as additional units are produced, and continue to decline. The average total cost (ATC) curve initially will decline as fixed costs are spread over a larger number of units, but will go up as marginal costs increase due to the law of diminishing returns. The graph below illustrates the shapes of these curves. Diminishing Returns and Diminishing Marginal Product of Capital The law of diminishing returns states that as one type of production input is added, with all other types of input remaining the same, at some point production will increase at a diminishing rate. There may be levels of input where increasing inputs causes production to go up at an increasing rate. However, according to the law of diminishing returns, at some point production will go up at a decreasing rate. The marginal product of capital is the increase in total output associated with an increase in capital, while holding the quantity of labor constant.