The marginal cost is the additional cost that occurs when an additional unit of output is produced. The average total cost, on the other hand, is the sum of all costs divided by how many units were made. When these two costs are equal to each other- meaning that when they both increase at a similar rate- then it would make sense for a business to produce more goods because there will be increased revenue and decreased production costs. However, if one of these two expenses increases faster than the other, it would not make sense for a company to produce more goods than before because their profit margin will decrease without any gains in revenue or savings in production costs.
However, when the marginal cost exceeds the average total cost- meaning that when it increases at a faster rate than the other- then it would not make sense for this company to produce more goods because their profit margin will decrease without any gains in revenue or savings in production costs. The optimum amount of output is reached where these two rates are equal with each other and neither of them increases any further; this means that there will be an increased gain in both revenue and decreased production costs if they continue producing more units.
The main idea behind this article is how to determine whether or not you should keep increasing your level of production (or “make” more) based on two variables: Marginal Cost and Average Total Cost. If we use a graph to illustrate the relationship between Marginal Cost and Average Total Cost, there would be a point where these two rates are equal with one another- this is called the optimum level of output.
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When Marginal Cost exceeds Average Total Cost
The optimum level of output when Marginal cost equals Average Total Cost is reached when the production costs increase at a slower rate than revenue increases. This would mean that there will be an increased gain in both revenues and decreased production costs if they keep producing more units. If Marginal Costs exceed the average total cost (or reach their maximum), then it might not make sense for them to produce any further because their marginal revenues are lower than their marginal costs which means that extra units produced may cause losses rather than gains.
In conclusion, when determining whether or not to produce any more units when Marginal Costs exceed the average total cost, it is best to look at all of these factors:
The present and future demand for the good or service being produced.
The price elasticity of demand i.e., how much it will change in response to a change in relative prices.
If the marginal cost exceeds the average total cost, then it is not optimal to produce more goods because doing so will cause a loss.
However, when there are economies of scale in production – that means when a business can lower its per-unit costs by producing more units – then marginal cost may be less than the average total cost and thus production should increase.
This factor is very important if one has an international market where transportation costs might differ from country to country as well.”
The marginal cost of production is the change in total costs when one more unit of a good or service is produced. The average total cost, on the other hand, includes all units and reflects what it actually costs to produce each additional item. When they are equal, this means that we have found the most efficient level of production for that particular company; if not then there’s an opportunity for optimization. If your business has reached full capacity but you can’t see any way to improve efficiency (i.e., through automation), then adding another person would be worth considering as long as their contribution outweighs their outlay.”
“For example, if you are an employee and your marginal cost is higher than the average total cost of employment, then it’s worth considering whether there might be a more efficient way to do that job. You could look for ways to automate repetitive tasks or delegate them to someone else.”