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The Relationship Between Average Cost and Marginal Cost definitions

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  • Average Cost
    Calculated by dividing total cost by output; changes direction based on whether marginal cost is above or below its value.
  • Marginal Cost
    Represents the expense of producing one additional unit; determines if average cost rises or falls.
  • Fixed Cost
    Remains unchanged regardless of production level; its impact per unit diminishes as output increases.
  • Variable Cost
    Increases with output; influences average variable cost and total cost calculations.
  • Average Fixed Cost
    Obtained by dividing fixed cost by output; consistently decreases as production expands.
  • Average Variable Cost
    Found by dividing variable cost by output; exhibits a U-shaped pattern as output changes.
  • Average Total Cost
    Sum of average fixed cost and average variable cost; can also be calculated as total cost divided by output.
  • Output
    Quantity of goods produced; affects the calculation and behavior of all average cost measures.
  • Total Cost
    Sum of fixed and variable costs for all units produced; used to determine average total cost.
  • U-Shape
    Describes the pattern where average variable cost and average total cost decrease then increase as output rises.
  • Driving Force
    Refers to marginal cost's role in determining whether average cost moves up or down.
  • Quantity
    Number of units produced; serves as the denominator in average cost calculations.
  • Cumulative GPA
    Used as an analogy for average cost; reflects the overall average after multiple periods.
  • Semester GPA
    Used as an analogy for marginal cost; shows the effect of a single period on the overall average.
  • Graph
    Visual representation of cost curves; helps distinguish the unique behavior of average fixed cost from other averages.