The extra production costs incurred are vital for decisions about changing output levels.

Marginal cost (MC) is the change in total cost associated with producing an additional unit of output.

 

Since TC = TFC + TVC, any change in total cost reflects changes in variable costs, as fixed costs do not depend on the output level.[1] Thus, producing an extra unit of output incurs marginal cost that equals either (a) the change in the total cost, or (b) the change in the total variable cost. Marginal cost for your firm is listed in column 8 of Table 3.

Table 3  Average Total Costs, Average Fixed Costs, Average Variable Costs, and Marginal Cost

 

(1)       Workers Per 8-hr Shift (L)	(2) Tons of Sand and Gravel Removed Daily (q)	(3)     Total Variable Cost ($) (w´L) (TVC)	(4)     Total Fixed Cost ($) (TFC)	(5)     Average Variable Cost ($) (3)/(2) (AVC)	(6)     Average Fixed Cost ($) (4)/(2) (AFC)	(7)     Average Total Cost ($) (5)+(6) (ATC)	(8)       Marginal Cost ($) (D3)/(D2) (MC)
0	0	0	$100	---	---	---	---
1	10	50	100	5.00	10.00	15.00	5.00
2	22	100	100	4.54	4.55	9.09	4.17
3	36	150	100	4.17	2.78	6.95	3.57
4	52	200	100	3.85	1.92	5.77	3.13
5	70	250	100	3.57	1.43	5.00	2.78
6	86	300	100	3.49	1.16	4.65	3.13
7	100	350	100	3.50	1.00	4.50	3.57
8	112	400	100	3.57	0.89	4.46	4.17
9	122	450	100	3.69	0.82	4.51	5.00
10	130	500	100	3.85	0.77	4.62	6.25
11	137	550	100	4.01	0.73	4.74	7.14
12	143	600	100	4.20	0.70	4.90	8.33
13	148	650	100	4.39	0.68	5.07	10.00
14	152	700	100	4.60	0.66	5.26	12.50
15	155	750	100	4.84	0.65	5.49	16.67
16	157	800	100	5.10	0.64	5.74	25.00
17	158	850	100	5.38	0.63	6.01	50.00
18	158	900	100	5.69	0.63	6.32	---
19	157	950	100	6.05	0.64	6.69	---

 

            Figure 4 shows how average variable cost (AVC) and marginal cost (MC) change as you process various amounts of earth. Why are these curves U-shaped? Recall that the marginal physical product of labor (MPPL) initially rose as you hired more labor but then fell when diminishing marginal returns were encountered. This means that the labor costs of additional output (its MC, in this case) initially decline, but diminishing returns ultimately cause marginal costs to rise as additional workers add less and less to total output. Similarly, the average physical product of labor (APPL) initially rose, but then declined as more workers were employed, causing the U shape of average variable cost curves. These relationships between production levels and costs will be detailed in a moment.

figure 4

The average variable cost (AVC) curve falls when marginal cost (MC) is below it, and rises when MC exceeds AVC. Average variable cost is at its minimum when AVC = MC. Both curves are U-shaped because, initially, gains from specialization push AVC and MC down. But eventually, as output is expanded, diminishing returns are encountered and the MC and AVC both rise.

 

Graphically Summing Average Costs

In Figure 5 we tack an average fixed cost (AFC) curve onto a graph with typical U-shaped marginal cost (MC) and average variable cost (AVC) curves. Summing vertically the AVC and AFC associated with each output level yields the average total cost (ATC) curve shown. Notice that as output increases, differences between the AVC and ATC curves shrink. The ATC and AVC converge, because their vertical differences equal AFC, which falls as output rises. We now take a quick look at how costs relate to production.

figure 5

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