Average Cost Vs Marginal Cost and Opportunity Cost

Average Cost

In economics, average cost is equal to total cost divided by the number of goods produced. It is also equal to the sum of average variable cost plus average fixed cost.

According to above schedule, average cost is constantly falling up to the 4th unit because fixed cost remains unchanged and the variable cost increases slowly but after the 4th unit the total cost is increasing first. This is the reason that average cost is also increases. In short, average cost falls in the beginning but after reaching a point, it increase. This schedule could also be converted into diagram as well.

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Marginal Cost

The marginal cost of an additional unit of output is the cost of the additional inputs needed to produce that output. More formally, the marginal cost is the derivative of total production costs with respect to the level of output. Marginal cost is the expanding output by one unit. Since fixed costs have no impact on marginal cost, it can be written as:

OPPORTUNITY COST

Cost associated with opportunities that are foregone when a firm’s resources are not put to their highest-value use.