FIXED, VARIABLE & MARGINAL COSTS (How the cost structure work)

Ave
Ave
Ave
No. of
Output
Fixed
Variable Total
Fixed
Variable Total
Workers Units/mth Costs
Costs
Costs
Costs
Costs
Costs
0
0
15000
0
15000
0
0
0
1
4000
15000
10000
25000
3.75
2.5
6.25
2
7000
15000
20000
35000
2.14
2.86
5.00
3
9000
15000
30000
45000
1.67
3.33
5.00
4
10000
15000
40000
55000
1.50
4.00
5.50
5
10600
15000
50000
65000
1.42
4.72
6.13
6
11000
15000
60000
75000
1.36
5.45
6.82
7
11400
15000
70000
85000
1.32
6.14
7.46
8
11200
15000
80000
95000
1.34
7.14
8.48
9
11000
15000
90000
105000
1.36
8.18
9.55
10
10900
15000
100000
115000
1.38
9.17
10.55

Marginal Cost (Average) =

TC for 0 worker minus TC for 1 worker/
Total output for 0 worker minus Total output for 1 worker
OR Change in TC/Change in the units of output
Why Average?
We are asking; what are the incremental cost per unit for the first 4000 units of output?
Then we can calculate the incremental cost per unit for the next 3000 units of output.
As you can see, it is becoming more expensive; because as we add more workers, we are becomin
The negative marginal costs signify that as we spend more money adding more workers, they impe
(a case of too many cooks spoiling the broth)
When the 8th worker is added all productivity declines (from 11400 to 11200) leading to a negative
Graphing
Output on Horizontal Axis

Marginal
Costs
(Ave)
0.00
2.50
3.33
5.00
10.00
16.67
25.00
25.00
-50.00 Negative Marginal Cost
-50.00 Negative Marginal Cost
-100.00 Negative Marginal Cost

2.5
3.33
ers, we are becoming less efficient
e workers, they impede each others productivity

eading to a negative MC (-50)