difference between AC and MC?
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Answer:
Difference between Marginal cost and average cost
Decision to optimization
Marginal cost
Maximization of profit can be obtained using marginal cost, where firm is selling with a price above its current cost and taking benefits, and its break-even is achieved when price is equal to marginal cost.
Average cost
For production decision purposes, the firm can choose to minimize its costs when average cost is the lowest as result of certain amount of production, implying the point where the company is more efficient producing with the lowest cost per unit.
Calculation method
Marginal cost
Marginal cost is expressed as a partial derivative of change of total costs with respect to a variation in a production unit, as shown as follows:
Average cost
Average cost is calculated as sum of fixed and variable costs, divided on total production, as show as follows:
Returns to scale and costs
Marginal cost
When velocity of production start to increase and there is increasing returns, Marginal cost is start to decrease, then change to constant returns in production and marginal cost and finally change to increasing marginal cost when production scale show decreasing returns.
Average cost
When velocity of production start to increase without presence of returns of scale, average cost start to diminish, then change to constant returns when velocity of production generates the minimum efficient scale and then change to increasing returns when average cost is greater than marginal cost.
Discrimination of costs
Marginal cost
The marginal cost includes all costs incurred to produce one additional unit of product of firm and cannot be discriminated in fixed or variable costs.
Average Cost
The average costs can be separated in average variable cost, where include costs related to velocity of production and average fixed cost where, only includes costs not related to level of production.
Shape of curves
Marginal Cost
The marginal cost curve is concave with increasing returns, then change to linear and smooth shape in constant returns and finally change to convex when marginal cost show increasing returns.
Average Cost
The average cost curve initiates fall as result of declining fixed costs but then rise due to increasing of average variable costs.
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