# Importance of costs to economistsTo be able to decide on the appropriate

Importance of costs to economistsTo be able to decide on the appropriate price and output required to maximise profits, managers need a detailed understanding of the level of costs at different levels of output and how costs might change over time.Cost is defined as “The value of the inputs needed to produce any goods or service” (Black, Hashimzade and Myles, 2013, p.86) Short run costsAverage cost (AC) : “Cost per unit of production (Fixed+Variable): AC=AFC+AVC” (Sloman, Garret and Wride, 2015, p.

141)Marginal cost (MC): “Extra cost of producing one more unit, that is the rise in total cost per one unite rise in output: MC= ”TC/”Q” (Sloman, 2001, p.91) Average and marginal costs MC35 AC AVC AR=D AFC 7 Source: (Adapted from Sloman, Garret and Wride, 2015, P.143) Relationship between marginal and average costSloman (2001, p.125) states that as long as new units of output cost less than the average, they must pull the average cost down.Therefore, as illustrated in the diagram above, if MC is greater than AC, AC must be rising and MC crosses the AC at its minimum point.

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This is because of a simple mathematical relationship between the marginal and the average(Begg and Ward, 2009, p.55).For example, assuming our average examination is 75, our next exam is our marginal exam.If we gain a higher score, the average will increase.In the opposite case, the average will move down.Knowing average total cost is critical in making pricing decisions, as any price below average total cost will result in a financial loss.

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