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Managerial Economics
Notes marginal cost. For example, if the total cost of a firm is 5,000 when it produces 10 units of a
good but when 11 units of the good are produced, it increases to 5,300 then the marginal cost
of the eleventh unit is 5,300 – 5,000 = 300. In other words, marginal cost of nth units (MC ) is
n
the difference between total cost of nth unit (TC ) and total cost of n-1th unit (TC ).
n n-1
MC = TC – TC
n n n–1
The relationship between MC, AC and TC is shown in the following table.
Table 8.3
The total cost concept is useful in break-even analysis and in finding out whether a firm is
making profits or not. The average cost concept is significant for calculating the per unit profit
of a business concern. The marginal and incremental cost concepts are needed in deciding
whether a firm needs to expand its production or not. In fact, the relevant costs to be considered
will differ from one situation to the other depending on the problem faced by the manager.
Example: The Cost of Producing Rings ( )
TC = FC + VC
ATC = TC/Q
AFC = FC/Q
AVC = VC/Q
ATC = AFC + AVC
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