Total cost is the sum of the market value of all the inputs that a firm uses in production. TC=FC+VC; where TC is Total Cost, FC is fixed costs and VC is variable costs. Average total cost is the total cost divided by the quantity of output. ATC=TC/Q; where ATC is average total cost, TC is total cost and Q is output. Marginal cost is the increase in total cost that arises from an extra unit of production. MC=ΔTC/ΔQ, where MC is marginal cost, ΔTC is the change in total cost and ΔQ is the change in output.
Work Step by Step
From a firm’s total cost, we can derive the average total cost and the marginal cost. For a typical firm, marginal cost rises with the quantity of output. Average total cost first falls as the output increases, but then rises as the output increases further.