What is the Difference Between Average Cost and Marginal Cost?

The difference between average cost and marginal cost lies in their definitions, purposes, and calculations. Here are the key differences between the two:

1. Definition: Average cost refers to the total cost of production divided by the number of goods produced. It helps to understand how much expenses are incurred while producing a single product. On the other hand, marginal cost refers to the additional cost of producing one more unit of output.
2. Purpose: The average cost aims to assess the impact on total unit cost with a change in output level. In contrast, the marginal cost aims to find whether it is beneficial to produce an additional unit of goods.
3. Formula: The formula for average cost is Total Cost / Number of goods. The formula for marginal cost is Change in Total Cost / Change in Quantity.
4. Shape of Curve: The average cost curve is typically U-shaped, initially decreasing and then increasing as output levels increase. In contrast, the marginal cost curve is usually upward-sloping, indicating that as more units are produced, the cost per additional unit increases.
5. Impact on Average Cost: Marginal costs can affect average costs. When marginal costs are high, they can increase the average cost, and when marginal costs are low, they can decrease the average cost.
6. Fixed and Variable Costs: Average cost considers both fixed and variable costs of production, while marginal cost only considers the variable costs involved in producing additional units.

In summary, average cost represents the total production cost per unit, while marginal cost represents the additional cost of producing one more unit. Marginal cost helps businesses decide whether to produce more units, while average cost helps them understand the overall efficiency of their production process.

Comparative Table: Average Cost vs Marginal Cost

The main differences between average cost and marginal cost are as follows:

In summary, average cost focuses on the impact of changes in output level on the total unit cost, while marginal cost evaluates the cost of producing an additional unit of output. Average cost is calculated by dividing the total cost by the number of goods, whereas marginal cost is calculated by dividing the change in total cost by the change in quantity.