Limit costs and average costs: the nature and differences

Limit costs are the costs that will be required to produce one additional unit of a product or product in relation to the estimated or actual volume of production. In other words, it is the increment of costs necessary to obtain the next unit of the product. In order to find marginal costs, it is necessary to subtract the indicators of two adjacent gross costs. Thus, in its form, marginal costs are very similar to the marginal utility of the commodity.

The ultimate physical product is the increase in output in physical units produced by an additional unit of variable costs, when other costs do not change. For example, while maintaining the level of costs for raw materials and energy, but increasing labor costs, we can thereby increase production by one additional unit. However, economic calculations have a monetary form. Thus, the concept of marginal costs is more preferable, since they are expressed in monetary units in contrast to the physical product measured in natural units (meters, pieces, etc.).

What are the advantages of margin analysis in the economic study of costs or costs? In the decision-making process, it is primarily a question of comparing the comparison of costs. As a result, it may often be expedient to, for example, replace expensive resources or raw materials with cheaper analogues. Such a comparison is best done using limit analysis.

Limit costs should be distinguished from a term such as "irreversible costs," which characterizes missed opportunities associated with a previously unreasoned decision. For example, you bought shoes, but for some reason they did not suit you. You are forced to sell them at a price lower than the original cost. The difference between the acquisition price and the sale cost represents irreversible costs. The latter are losses and are not taken into account in the decision-making process.

It is also necessary to distinguish between average and marginal costs. Average costs are determined by dividing the total cost of production. Obviously, a company can not sell goods at a cost below average costs, because then it will simply go bankrupt. Thus, average costs are an important indicator of the work of the enterprise.

The average and marginal costs of production are interrelated. When the value of the first reaches a minimum, they must be equal to the second.

For this reason, the adoption of any economic decisions must be accompanied by marginal, or marginal, analysis.

It is possible to estimate the inefficiency and effectiveness of alternative solutions on the basis of limit comparisons that assume an estimate of the increments in the limit, that is, on the boundary of the change in specific quantities. The nature of economic decisions basically determines what the marginal costs will be, whether the increment of costs will be negative or positive.

As already noted, marginal costs in form are in many respects similar to marginal utility, where the additional usefulness of the good is meant. Therefore, all limit values can be evaluated as differential concepts, because in this case we are talking about incrementing additional quantities (costs, utility, etc.).

Thus, marginal costs enable the firm to forecast the competitive offer of its product. To do this, compare the marginal cost curve and the supply curve. The maximum profit will be achieved at the point where the supply curve and the equilibrium market price line intersect.