Average costAverage cost (or cost per unit) is equal to total Costs/Output. When output is small, average cost will be spread over a small number of units of output. As output increases, average cost will tend to fall as each unit is 'carrying' a smaller element of fixed cost. Average cost will also fall because, for a time, there will be increasing returns to the variable factors as more of them are employed and more specialized methods adopted. There will come a point, however, when diminishing returns are encountered and average cost begins to rise. Marginal cost The economist is interested in marginal quantities because most economic decisions involve changes in some existing situation. Marginal cost tells us what happens to total costs when we vary output by some small amount. More precisely, marginal cost is the extent to which total costs change when output is changed by one unit. Marginal cost — Total cost of N units — Total cost of (N — 1) units. Since marginal cost is a measurement of changes in total cost it is obviously influenced by variable costs but not by fixed costs. Summary 1. Total cost = Fixed costs + Variable cost 2. Average cost = Total costs / Total output 3. Marginal cost = Change in total cost when output is
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