Marginal costs and average costs: the nature and differences

Marginal costs - are costs that will be required to produce one additional unit of the product or products in relation to the estimated or actual production volume.In other words, the incremental cost required to produce the next unit price.To find the marginal costs must be deducted two adjacent indicators of total costs.Thus, in its form marginal costs are very similar to the marginal utility of the product.

marginal physical product - this increase in output in physical units, generated by an additional unit of variable costs, while other costs are not changed.For example, maintaining the level of costs for raw materials and energy, but increased labor costs can thus increase production by one additional unit.However, economic calculations have cash.Thus, the concept of marginal cost is more preferable, because they are expressed in monetary units as opposed to the physical product, measured in physical units (meters, pieces, and so on).

What advantages still gives marginal analysis in the study of economic costs or expenses?In the process of decision-making in the first place it comes to comparing the cost comparison.In some cases it may be expedient, for example, to replace the expensive resources or raw cheaper analogs.Such a comparison is best done with the use of marginal analysis.

marginal cost must be distinguished from such a term as "sunk costs", which characterizes the missed opportunities associated with an earlier ill-considered decisions.For example, you purchased the shoes, but for whatever reason you did not come.You are forced to sell them at a price below cost.The difference between the purchase price and the sale is irreversible costs.Recent losses are not taken into account in decision-making.

is also necessary to distinguish between average and marginal costs.The average cost is determined by dividing the total cost of production volume.It is obvious that the company can not sell goods at below average costs, because then it simply goes bankrupt.Thus, the average cost - an important indicator of the enterprise.

average and marginal costs of production are interrelated.When the first reaches a minimum, they must be equal to the second.

It is for this reason, any economic decision-making should be accompanied by a margin, or limit, the analysis.

Evaluate the effectiveness and ineffectiveness of alternative solutions can be based on the marginal comparisons that involve assessment of the increments in the limit, that is on the boundary change specific values.The character of economic decision-making largely determines what will be the marginal cost, whether incremental costs negative or positive.

As already noted, the marginal cost of the form is largely similar to the marginal utility, which means an additional useful benefits.Therefore, all the limit values ​​can be evaluated as the differential concepts, because in this case we are talking about additional increment value (cost, utility, and so on).

Thus, the marginal costs allow the company to predict the competitive offer of its product.To do this, compare the marginal cost curve and the supply curve.Maximum profit is achieved at the point where it will intersect the supply curve and the line of equilibrium market price.