Total cost is everything spent on producing an output. Average cost is total cost per unit, and marginal cost is the extra cost of one more unit.
This lesson is part of cost and productivity from a supplied table. The production version of the same idea is in total, average and marginal quantities.
Which formula goes with which column?
| Column | Formula | What it tells you |
|---|---|---|
| Total cost (TC) | Given | Spending on all units so far |
| Average cost (AC) | TC ÷ Q | Cost per unit |
| Marginal cost (MC) | TC now − TC before | Cost of the last unit |
Average cost uses a single row. Marginal cost always needs two neighbouring rows.
Worked example: a fictional pottery studio
Total cost is RM40 at zero output. That RM40 is the fixed cost, since it is paid even when nothing is made.
| Q | TC (RM) | MC (RM) | AC (RM) |
|---|---|---|---|
| 0 | 40 | none | none |
| 1 | 60 | 20 | 60 |
| 2 | 76 | 16 | 38 |
| 3 | 90 | 14 | 30 |
| 4 | 108 | 18 | 27 |
| 5 | 130 | 22 | 26 |
| 6 | 162 | 32 | 27 |
Sample working: MC at 4 = 108 − 90 = 18. AC at 5 = 130 ÷ 5 = 26. The first MC uses the zero-output row: 60 − 40 = 20.
Why does AC fall and then rise?
Compare each MC with the AC before it. At Q = 5, MC is 22, below the earlier AC of 27, so AC falls to 26.
At Q = 6, MC is 32, above the earlier AC of 26, so AC rises to 27. The lowest AC is at Q = 5. MC rises above AC between Q = 5 and Q = 6, so AC turns upward there.
The same idea as the production lesson applies: a new figure above the average pulls it up, and one below pulls it down.
The mistake that costs marks
The common slip is to compute MC as TC ÷ Q. A student writes MC at 4 as 108 ÷ 4 = 27, which is actually AC.
Another slip is forgetting that the first MC needs the zero-output row. Without it, the first unit has nothing to be subtracted from, so always look for the row at Q = 0.
The fix: if the word is “extra” or “additional”, subtract. If the word is “per unit”, divide.
Check yourself
A fictional stall has TC of RM50, 70, 84, 96 and 114 at Q of 0, 1, 2, 3 and 4. Find MC at Q = 3 and AC at Q = 4, and say whether AC falls or rises between Q = 3 and Q = 4.
Answer
MC at Q = 3 = 96 − 84 = RM12.
AC at Q = 4 = 114 ÷ 4 = RM28.50.
AC at Q = 3 = 96 ÷ 3 = 32. MC of the fourth unit = 114 − 96 = 18, which is below 32, so AC falls to RM28.50.
What to study next
Continue with recovering a missing cost value, which uses these relationships to fill gaps. Return to the set overview any time.
If you want a teacher to watch you work through cost tables, see online one-to-one Economics tuition.