In this video I look further into economics and show that the average cost of producing one item when x items are produced is minimum when the average cost equals the marginal cost. This is an important principle to understand and it is easily derived using the calculus principles that I have covered in my previous videos.

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Economics – Marginal Cost vs Average Cost

If average cost is minimum then marginal cost = average cost

Cost function, C(x)

• cost to produce x amount of items
  Marginal Costs, C’(x)
• Derivative of C(x)
• Rate change of C(x)
• Approximately cost to produce 1 more item
  • If x is a large number
    • .e. x = 1000 cars. C’(x) = cost to produce the 1001st car (approximately)

Economies of Scale:

• More efficient use of the fixed costs of production
• Decreased marginal costs
• Cost function concave downwards

Eventually there will be an inflection point and the cost will concave upwards (marginal costs increase), perhaps because of overtime costs or the inefficiencies of a large-scale operation.

Average Cost, c(x)

• Cost per item when x items are produce

• Slope of the line that joins the origin to the point (x, C(x) on the C(x) curve

• The above principle is plausible because if our marginal cost is smaller than our average cost, then we should produce more, thereby lowering the average cost.
• If the marginal cost is larger than our average cost, then we should produce less in order to lower our average cost.