With an increase in production volumes, the burden of fixed costs per unit of output decreases, and this leads to a decrease in production costs. However, in practice, a situation often arises when an increase in production leads to the opposite effect. This is due to the marginal cost factor.
Instructions
Step 1
Specify an increase or decrease in production volumes, i.e. set the change in Q - ∆ Q (delta Q). Build a digital series (in the table), setting various indicators of production volumes.
Step 2
Determine the total cost (TCi) for each value of Q using the formula: TCi = Qi * VC + PC. However, you need to understand that before calculating the marginal cost, you must calculate the variable (VC) and fixed (PC) costs.
Step 3
Determine the change in total costs as a result of an increase or decrease in production, i.e. determine the change in TC - ∆ TC. To do this, use the formula: ∆ TC = TC2-TC1, where:
TC1 = VC * Q1 + PC;
TC2 = VC * Q2 + PC;
Q1 is the volume of production before the change, Q2 - production volumes after the change, VC - variable costs per unit of production, PC - fixed costs of the period required for a given volume of production, ТС1 - total costs before the change in the volume of production, TS2 - total costs after a change in production.
Step 4
Divide the increment in total costs (∆ TC) by the increment in production (∆ Q) - you get the marginal cost of producing an additional unit of output.
Step 5
Plot a graph of changes in marginal costs for different volumes of production - this will give a visual picture of the mathematical formula, which will clearly demonstrate the process of changing production costs. Pay attention to the shape of the MC curve on your graph! The curve of the marginal costs of the MC clearly shows that with all other factors unchanged, with an increase in production, the marginal costs increase. It follows from this that it is impossible to infinitely increase production volumes without changing anything in production itself. This leads to an unreasonable increase in costs and a decrease in the expected profit.
