Column IV includes the Average Variable Cost. Column lll exhibits Average fixed cost which is a ratio of Total Fixed Cost to Total Output. We need to look carefully that in the table 4.3, production units are shown in Column l, 7 units are produces. The three phases marked as Diminishing Marginal Cost, Constant Marginal Cost and Increasing Marginal Cost exactly correspond with Increasing Marginal Returns, Constant Marginal Returns and Diminishing Marginal Returns on the output or returns side, where returns diminish, costs increase and both are constant for the same units of output. Finally, from unit 4 onwards marginal cost continuously increases from 1.42 to 10. Then between 3 to 4 units of production it remains constant. To begin with from 2 units of production to 3 units of production the marginal cost decreases from 2.5 to 1.42. We can observe that, the marginal cost behavior exhibits three phases of change. This is a ratio of marginal or additional variable cost (which is 10) divided by marginal units of output produced. Column VI includes the Marginal Cost per unit of output produced. In column V we have the Total Cost which is the sum of fixed and variable costs.
Column IV portrays Marginal Output that changes. Column III explains Variable Cost of production at the rate of $ 10 per unit of variable inputs. This remains constant throughout the act of production. In column II exhibits the $ 40 as Fixed Cost. Moreover, as the variable units go on increasing this cost will continuously increase as a multiple of 10.Ĭolumn I depicts the Units of Production in the hypothetical example (Table 4.2). This amount will remain constant throughout the act of production.
To make our observations clear, Let us assume that fixed costs are of the value of $40. Marginal cost (MC) is the extra cost of producing one more unit of output.
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