Marginal cost is the rate at which something costs more than an equivalent amount of an alternative item. For example, selling a pack of cards costs more than just buying a single card, and buying a single card is more expensive than both a pair of socks and a long sleeve shirt.
This cost difference can be significant in the markets where fashion brands are dominant — even if they do not manufacture all their pieces together. For instance, beauty product manufacturers typically produce both lipstick and lip balm sets together, so one must purchase both items together to obtain the full cost difference.
This is important to recognize when exploring whether marginal cost exceeds average total cost in the short run.
There is a downward sloping short run average total cost curve
When we talk about marginal cost in economics, we are not talking about how much it costs to produce a unit of output. We are talking about how much it costs to reproduce a given number of units of output.
In the production of goods and services, there are three sources of cost: material cost, human cost, and organizational cost. When we talk about marginalcost in economics, we are not talking about how much it costs to produce a unit of output.
There is no relationship between marginal cost and average total cost in the short run
In the short run, there is no relationship between marginal cost and average total cost. This is due to two things: first, most goods and services are not expensive in the short run and second, in the short run, there is no time to calculate average total cost.
In the long run, when time becomes an issue, then average total cost must be calculated. In the long run, when time becomes an issue, then simple arithmetic must be used to calculate average total cost.
The firm will be profitable
If marginal cost is higher in the short run, then the firm will be profitable. This is likely to be true even if some of the inputs are expensive in the long run.
Since the firm is going to make a profit in the long run, it can spend money on things that are valuable for now. For example, it can buy supplies and equipment for its business at this point in time.
In the long run, it will have to pay more for those supplies and equipment because they will need to be replaced! This is why at some point in time, one of those inputs must be eliminated so that more money can be spent on supplies and equipment for the business.
Know this information now and take advantage of it.
The firm will be unprofitable
If marginal cost is more expensive in the short run, then the firm will be unprofitable. This is likely the case if we look at low-cost producers as substitute products for the firm’s high-cost product.
In order for a firm to stay profitable, it must find ways to lower its marginal cost. If costs continue to rise, then eventually even the low-cost producer will lose money and cease production.
This may seem like a loss, but it helps illustrate what a cost can be worth to a company. A company may have spent thousands of dollars on equipment and materials that produced a product that was worth only $50 in sales.
However, if it had produced just one unit more than its initial investment would have paid off and saved it from going under. This is an investment that will last for years, so there is always potential for growth.