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Question
Answer the following question:
Explain the concept of Total Cost, Average Cost and Marginal Cost.
Solution
Total cost refers to the total cost of production that is incurred by a firm to carry out the production of goods and services. It is the aggregate of expenditure incurred on fixed factors, as well as variable factors. That is,
TC = TFC + TVC
Average cost is defined as the per unit cost of producing output. It is derived by dividing total cost by the quantity of output produced. That is,
Average Cost = TCTQ
Marginal cost is defined as the additional cost to the total cost, which is incurred for producing one more unit of output. It can be calculated by either of the following two formulas:
a. MCn = TCn – TCn– 1
b. MC = `"Change in total cost"/"Change in quanity of output"`
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