On day 2 of the Year 13 recap we continue a review of the different costs that producers face by specifically looking at marginal and average costs.
When a producer increases production more labour, capital and materials will need to be used. This means that the variable costs of production will also increase. However, fixed costs of production do not change. Therefore, as more units are produced, fixed costs can be spread over a larger range of output. Variable costs of production fall for the first range of output, but then begin to rise afterwards due to a business reaching capacity. This represents the average total costs of a business.
A producer also needs to identify its own marginal costs of production if it is to be able to identify the output level in which it can maximise profits. The marginal cost of production represents the additional cost associated with producing an extra unit of output. Once again, a producer would expect that the marginal cost will increase for higher levels of output.
Here Jacob guides you through the revision slide on Marginal and Average Costs: