Production (Short-Run Production) turns into costs once you pay for inputs. The costs a firm counts include implicit ones (Accounting and Economic Profit).
Key idea
Fixed cost (FC) doesn't change with output in the short run; variable cost (VC) does; $TC = FC + VC$. Per unit: $AFC = FC/q$, $AVC = VC/q$, $ATC = TC/q = AFC + AVC$. Marginal cost is the extra cost of one more unit: $MC = \Delta TC / \Delta q$, which equals $\Delta VC / \Delta q$ because fixed cost doesn't change.
Why it works
Marginal cost mirrors marginal product. If a worker costs \$20 an hour and the next worker adds 4 units an hour, those units cost \$5 each. When marginal product rises, marginal cost falls; once diminishing returns set in, marginal cost rises. That's why MC curves are U-shaped. Fixed cost has no "marginal" part: you pay it whether you make 0 units or 100.
| q | TC | FC | VC | MC | AVC | ATC |
|---|---|---|---|---|---|---|
| 0 | \$30 | \$30 | \$0 | |||
| 1 | \$50 | \$30 | \$20 | \$20 | \$20 | \$50 |
| 2 | \$62 | \$30 | \$32 | \$12 | \$16 | \$31 |
| 3 | \$72 | \$30 | \$42 | \$10 | \$14 | \$24 |
| 4 | \$84 | \$30 | \$54 | \$12 | \$13.50 | \$21 |
| 5 | \$110 | \$30 | \$80 | \$26 | \$16 | \$22 |
| 6 | \$144 | \$30 | \$114 | \$34 | \$19 | \$24 |
Worked example: From total cost to everything else
Using the table, find fixed cost, the variable cost of 4 units, the average total cost of 4 units and the marginal cost of the 5th unit.
- Fixed cost is total cost at $q = 0$: \$30.
- $VC(4) = TC(4) - FC = \$84 - \$30 = \$54$.
- $ATC(4) = \$84 \div 4 = \$21$.
- $MC$ of unit 5: $TC(5) - TC(4) = \$110 - \$84 = \$26$.
Answer: FC \$30, VC \$54, ATC \$21, MC \$26.
Worked example: Marginal cost from marginal product
A worker costs \$24 an hour. The next worker hired adds 8 units an hour. What is the marginal cost of those units?
- The extra \$24 buys 8 extra units.
- $MC = \$24 \div 8 = \$3$ per unit.
Answer: \$3 per unit.
Common mistake
Computing marginal cost as total cost divided by quantity (that's ATC), or letting fixed cost change with output. In the table, $TC(5)/5 = \$22$, but the 5th unit itself costs \$26. Check: MC is always a difference between two rows; averages are a division within one row.