Costs & Output: key terms, formulas and examples
Costs shape output decisions: marginal cost is the cost of one more unit, scale lowers average cost, but diminishing returns raise it when you crowd a fixed resource.
Example
A fifth worker in a tiny workshop adds less than the first.
Takeaway
Expand while the extra unit earns more than it costs.
Key terms
- Marginal cost
- Extra cost of producing one more unit.
- Economies of scale
- Average cost per unit falls as output grows.
- Scalability
- Ability to grow sales a lot without costs growing as fast.
- Recession
- A period when the economy shrinks and jobs and sales fall.
- Diminishing returns
- Each extra unit of input adds less output than the one before.
- Economies of scope
- Savings from producing several products together.
- Average cost
- Total cost divided by units produced.
- Break-even point
- The sales level where profit equals zero.
Formulas
Marginal costΔTC ÷ ΔQ
Average total costTC ÷ Q
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