Difference Between Marginal Cost and Average Cost

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The main difference between Marginal Cost and Average Cost is that average cost refers to the cost of producing each unit of goods by the business over a certain period. On the other hand, marginal cost focuses on the change in total production costs that occur when producing one additional unit.

What is Marginal Cost?

The change in the overall cost that results from increasing the amount produced, or the cost of producing more, is known as the marginal cost in economics. It might mean a unit of output increment in some circumstances or the rate at which the total cost changes while production increases by a negligible amount. This table provides an overview of the definition, formula, purpose, importance and special considerations of marginal cost.

DefinitionThe change in total production cost resulting from producing one additional unit.
Marginal FormulaMarginal Cost = Change in Total Expenses / Change in Quantity of Units Produced
PurposeDetermine the point where an organisation achieves economies of scale for optimal production.
ImportanceHelps to optimise production levels and maximise profits by producing where marginal cost equals marginal revenue.
Variable CostsCosts that change based on production levels. Producing more units adds more variable costs.
Fixed CostsConstant regardless of production levels. Higher production leads to a lower fixed cost per unit as the total is spread over more units.
Special ConsiderationsMarginal cost may vary within different ranges of production. Increase in production might lead to step costs due to changes in relevant ranges.
Pricing StrategyMarginal cost pricing doctrine suggests setting prices based on marginal costs for economic efficiency.

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What is the Average Cost?

Average Cost, also called average total cost (ATC), is the cost per output unit. We can calculate the average cost by dividing the total cost (TC) by the total output quantity (Q). This table provides a concise overview of the definition, formula, example, calculation, importance, and relation to the marginal cost of average cost.

DefinitionAverage cost is the average price of goods or services, calculated as the total cost divided by the number of units.
Average FormulaAverage cost = Total cost of the units / Number of units
ExampleFor example, if the prices of 11 bags are Rs. 500, Rs. 550, Rs. 450, …, Rs. 490, then the average cost would be Rs. 500.
CalculationSum up all costs and divide by the number of items.
ImportanceHelps shopkeepers in buying and selling processes by providing a metric for the average price of goods or services.
Relation to Marginal CostAverage cost includes fixed and variable costs, while marginal cost focuses on the additional cost per unit produced.

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What is the Difference Between Marginal Cost and Average Cost

This table highlights the key differences between Marginal Cost and Average Cost in terms of definition, formula, aim, shape of the curve, best criteria, and components.

Difference Between Marginal Cost and Average CostAverage cost Marginal Cost
DefinitionThe per-unit production cost of goods over a periodCost of producing one more unit or additional unit
FormulaTotal Cost / Number of Units ProducedChange in Total Cost / Change in Quantity
AimAssess the impact on total unit cost with output levelDetermine if it’s beneficial to produce extra units
Shape of CurveStarts falling due to declining fixed costs, then risesConcave with increasing returns, linear with constant returns, convex with increased returns
Best CriteriaMinimize costProfit maximization
ComponentsAverage Fixed Cost + Average Variable CostSingle unit, no components

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Marginal Cost and Average Cost Formulas 

Let’s understand Marginal Cost and Average Cost through an example: The company’s average cost per unit of the product is Rs. 100, calculated by dividing the total cost (Rs. 10,000) by the number of units produced (100). Meanwhile, the marginal cost of producing one additional unit is Rs. 500, indicating the increase in total cost when the production quantity increases by one unit.

Aspect Average Cost Formula
Marginal Cost Formula
FormulaTotal Cost / Number of Goods
Change in Total Cost / Change in Quantity
ExampleSuppose a company’s total cost
is Rs. 10,000 and it produces
100 units of a product.

Average Cost = 10,000 / 100 = Rs. 100
Suppose you are producing one
additional unit incurs an additional
cost of Rs. 500

Marginal Cost = 500

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Application of Marginal Cost and Average Cost in Real Life

Marginal Cost informs pricing, project profitability and optimal production. Average Cost helps in cost-effectiveness analysis, outsourcing decisions and overall financial assessment in various real-life business scenarios. Marginal Cost and Average Cost typically helps in : 

  • Pricing decisions in businesses.
  • Assessing profitability of new projects.
  • Determining optimal production levels.
  • Evaluating outsourcing versus in-house production.
  • Analyzing cost-effectiveness of marketing strategies.

This table outlines the differences between using marginal cost and average cost based on the time frame and type of decision being made.

Perspective Time Frame Decision Type
Cost Measure Considerations
Short-termImmediateImmediate impact of each unit
Marginal costAnalyzing the impact of each
additional unit produced or sold, focusing on variable costs
Long-termOverallEfficiency and profitabilityAverage costConsidering overall costs, both fixed and variable, for capacity planning and pricing
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FAQ’s

What is the difference between MC and AC?

Marginal cost (MC) represents the cost of producing one additional unit, whereas average cost (AC) is the total cost divided by the number of units produced.

What is the key difference between average total cost and marginal cost?

Average total cost (ATC) shows the average cost per unit produced, while marginal cost (MC) reveals the cost of producing one more unit.

What is the difference between marginal cost and average fixed cost?

Marginal cost (MC) represents the cost of producing an additional unit, while average fixed cost (AFC) is the fixed cost per unit produced.

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