Economics Short Run Vs Long Run Costs Questions Long
Marginal cost refers to the additional cost incurred by producing one more unit of output. It is calculated by dividing the change in total cost by the change in quantity produced. In other words, it measures the cost of producing an additional unit of output.
The relationship between marginal cost and average total cost is important in understanding the cost structure of a firm. Average total cost (ATC) is the total cost per unit of output and is calculated by dividing total cost by the quantity produced. It represents the average cost of producing each unit of output.
The relationship between marginal cost and average total cost can be understood through the concept of economies of scale. In the short run, as a firm increases its production, it may experience decreasing marginal cost. This means that the cost of producing each additional unit decreases. As a result, the average total cost also decreases.
This occurs because fixed costs, such as rent and machinery, are spread over a larger quantity of output. Additionally, the firm may benefit from increased specialization and efficiency in production processes. These factors lead to economies of scale, resulting in a downward sloping average total cost curve.
However, in the long run, as the firm continues to increase its production, it may eventually experience increasing marginal cost. This means that the cost of producing each additional unit increases. As a result, the average total cost starts to increase.
This occurs because the firm may face diminishing returns to scale. As the firm expands its production capacity, it may encounter constraints such as limited availability of inputs or managerial inefficiencies. These factors lead to diseconomies of scale, resulting in an upward sloping average total cost curve.
Therefore, the relationship between marginal cost and average total cost is such that when marginal cost is below average total cost, average total cost decreases. Conversely, when marginal cost is above average total cost, average total cost increases.
In summary, marginal cost measures the additional cost of producing one more unit of output, while average total cost represents the average cost of producing each unit of output. The relationship between these two concepts is influenced by economies and diseconomies of scale, which determine the shape of the average total cost curve.