B2.01.04: Average, Total and Marginal Costs

Question 1

Define Average costs

Answer 1

It’s the cost per unit of production

Question 1

Define Marginal costs

Answer 1

It’s the additional cost incurred by producing an extra unit of a good or service

Question 2

Formula for Average cost (AC)

Answer 2

AC = TC / Q

Question 3

Formula for Marginal cost (MC)

Answer 3

MC = ∆TC / ∆Q

Question 4

When plotting the MC curve, at the very bottom of the curve, what starts to happen?

Answer 4

You start to see diminishing returns from there

Question 5

Before the very bottom of the MC curve, what is happening to labour and why?

Answer 5

Labour productivity increases hence, marginal product increases
- This is due to specialisation of workers and under utilisation of fixed FOP
Therefore, leading to marginal costs to decrease (more efficient)

Question 6

After the very bottom of the MC curve, what is happening to labour and why?

Answer 6

Labour productivity decreases hence, marginal product decreases.
- This is due to the fixed FOP becoming a constraint on production
Therefore, leading to marginal costs to increase (less efficient)

Question 7

Where does the MC curve always intersect?

Answer 7

Both AC and TC curves at their lowest points

Question 8

What is the description for the diagram showing abnormal / economic profit. Remember to refer to the diagram in your explanation (4 marks)

Answer 8

• Diagram shows abnormal / economic profit
• This is shown as ABCD
• This is because point E is the profit maximising point (MR = MC)
• The profit per unit is AB (AR - AC) multiplied by output AB

Remember that point E is where MR curve intersects MC curve

Question 9

Formula for TFC?

Answer 9

ALL VALUES ARE THE SAME in the short term!