Page 129 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Average Total Cost (ATC)
The average total cost or what is called simply average cost is the total cost divided by the
number of units of output produced. Therefore,
TC
ATC=
Q
Since the total cost is the sum of total variable cost and total fixed cost, the average total cost is
also the sum of average variable cost and average fixed cost.

This can be proved as follows:
TC
ATC =
Q
Since TC = TVC+TFC
TVC+TFC
Therefore, ATC=
Q
TVC TFC
=
Q Q
= AVC + AFC

Average total cost is also known as unit cost, since it is cost per unit of output produced.
8.3.2 Short Run Marginal Cost (MC) and Output

Marginal cost is the addition to the total cost caused by producing one more unit of output.
In other words, marginal cost is the addition to the total cost of producing n units instead of
n-1 units.
MC = TC –TC
n n n–1
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.
d(TVC)
MC=
dQ
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

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