Page 129 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes In symbols, marginal cost is rate of change in total cost with respect to a unit change in output,
i.e.,
d(TC)
MC =
dQ
Where,
d in the numerator and denominator indicates the change in TC and Q respectively.

It is worth pointing out that marginal cost is independent of the fixed cost. Since fixed costs do
not change with output, there are no marginal fixed costs when output increases in the short run.

It is only the variable costs that vary with output in the short run. Therefore, marginal costs are,
in fact, due to the changes in variable costs.

The independence of the marginal cost from the fixed cost can be proved algebraically as
follows:
MC = TC – TC
n n n–1
= (TVC + TFC) – (TVC + TFC)
n n–1
= TVC + TFC – TVC – TFC
n n–1
= TVC – TVC
n n–1
Hence, marginal cost is the addition to the total variable costs when output is increased from
n-1 units to n units of output. It follows, therefore, that the marginal cost is independent of the
amount of fi xed costs.

In Table 9.1, MC is the slope of the TC curve. As TC curve first rises at a decreasing rate and later

on at an increasing rate, MC curve will also, therefore, first decline and then rise.

Table 9.1: The Relationship between MC, AC and TC
Unit of goods Total Cost TC Average Cost MC = {(TC ) – (TC )}
n–1
n
produced (2) AC = TC/units produced (4)
(1) (3 = 2/1)
10 5000 500 -
11 5300 481.82 300
12 5550 462.5 250
13 5700 438.46 150
14 5950 425.0 250
15 6350 423.33 400

Advantage of TC: break-even analysis profi t of fi rm
Advantage of AC: calculating per unit profit of a fi rm

Advantage of MC: to decide whether a firm needs to expand or not

The properties of the average costs (AVC, AFC, ATC) and marginal costs can briefly be described

as follows:
1. AFC declines continuously, approaching both axes asymptotically.

2. AVC first declines, reaches a minimum and rises thereafter. When AVC attains minimum,
MC equals AVC.
3. As AFC approaches asymptotically the horizontal axis, AVC approaches ATC
asymptotically.

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