Average cost and marginal cost are interrelated and fluctuate based on supply and demand. Marginal cost is the cost of producing one additional unit, while average cost is the ratio of total cost to the total number of goods sold. When marginal cost is greater than average cost, it pulls the average up, and when it is lower, it pushes the average down. The supply curve is important in understanding the relationship between these costs.
Basic average cost and marginal cost of a business are very different concepts, but they work together and fluctuate up and down according to how the other cost grows or falls. Average cost can be described as the ratio of total cost to the total number of goods sold. It is equal to the total cost of goods sold divided by the number of items sold. It has a very strong relationship with the supply and demand curves. Average cost can also be described as the sum of average variable costs and average fixed costs. On the other hand, marginal cost is the cost incurred due to one additional unit or product. Average cost and marginal cost are interrelated because when marginal cost goes up or down, average cost will fluctuate as well.
The average cost is different from the actual price because it depends on the overall relationship between supply and demand. In some situations, the price may be lower than the average cost, depending on the marginal cost. Marginal cost is the variable cost of producing one additional unit. When it is greater than average cost, then marginal cost pulls the average up. If it is lower than average cost, then marginal cost pushes average cost down. These are the relationships between these two entities. When the average cost and the marginal cost are the same value, the average cost remains constant, without any change.
If the average cost increases with the increase in the results, then the company has an increasing cost. Expenses would increase as administration costs and coordination of employees become difficult and complex. On the other hand, if average costs decrease over time, while production increases, costs would decrease. This could be done by adding more specialists in the employee category and implementing customized plans. The supply curve is very important considering the relationship between average cost and marginal cost. An organization’s supply curve can be thought of as the part of the marginal cost curve that lies above average variable cost.
Average cost and marginal cost are related to each other. Marginal cost always changes the parameter, as it can fluctuate with changes in output. It is the ratio of the change in total cost to the change in output. The average total cost decreases at first but then increases as a general behavior. It depends on the average variable costs and the average fixed costs since it is the sum of them. If average variable cost increases, average total cost can increase, but only when average variable cost is greater than average fixed cost. Average cost will also not increase even if average variable cost rises sharply, which may be due to rapidly declining average fixed cost.
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