Marginal cost and total cost are related in determining the cost of production for firms. Fixed costs and marginal variance are considered when determining total cost, which includes marginal costs. The drug development industry is an example of an industry with low marginal costs but high average total costs.
Marginal cost and total cost are related in terms of the cost of production for manufacturing firms or service providers. Fixed costs and the marginal variance in cost are considered when determining total cost, so total costs encompass marginal costs. Average total cost will usually decrease to a minimum before increasing, forming a U-shape. Marginal cost and total cost often intersect on a graph, although marginal cost curves can take different shapes, depending on the process.
When determining marginal cost and total cost, companies must first calculate initial fees and fixed costs. These costs cannot vary and are necessary for the process to occur. Examples of these would include rent, manufacturing equipment, a minimum number of employees, or other costs that will not change with output production. Ultimately, the costs will be high compared to the marginal cost of production, but they will factor in the average total cost per unit along with the marginal cost.
An example of marginal cost and total cost is found in the drug development industry. The fixed cost and startup costs are incredibly high, including everything from hiring research specialists to running experiments and buying manufacturing equipment to make the drugs. Additional fixed costs, which contribute to total costs, would include clinical trials, marketing campaigns, and costs involved in regulation and certification. These are often necessary for the industry to generate a revenue stream and do not vary based on how many units of a drug are produced.
The marginal cost will probably be low to produce additional units of the drug. Once the research has been done, the drug developed, and the manufacturing equipment and factories set up, it won’t cost much to produce a pill. In this way, a company can produce large quantities of drugs without drastically increasing costs. Companies take advantage of low marginal costs to recover their high fixed costs through the sale of drugs.
The drug development industry is an example of an industry that produces products with low marginal cost but high average total cost. Since the cost of research and development, as well as the cost of machinery, must be taken into account when determining the total cost, the average cost of each pill will be quite high. Low marginal costs can offset some of these high fixed costs, allowing companies to justify a higher total cost.
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