Limit costs are costs thatwill be required for the production of one additional unit of goods or products in relation to the calculated or actual volume of production. In other words, it is the increment of costs necessary to obtain the next unit of the product. In order to find marginal costs, it is necessary to subtract the indicators of two adjacent gross costs. Thus, in its form, marginal costs are very similar to the marginal utility of the commodity.
The ultimate physical product is an increaseoutput in physical units, produced by an additional unit of variable costs, when other costs do not change. For example, while maintaining the level of costs for raw materials and energy, but increasing labor costs, you can thereby increase production by one additional unit. However, economic calculations have a monetary form. Thus, the concept of marginal costs is more preferable, since they are expressed in monetary units, unlike a physical product measured in natural units (meters, pieces, etc.).
What are the advantages of marginalanalysis in the economic study of costs or costs? In the decision-making process, it is primarily a comparison of costs. As a result, it may often be expedient to, for example, replace expensive resources or raw materials with cheaper analogues. Such a comparison is best carried out using limit analysis.
Limit costs should be distinguished from suchterm, as "irreversible costs," which characterizes missed opportunities associated with the previously unreasoned decision. For example, you bought shoes, but for some reason they did not suit you. You are forced to sell them at a price lower than the original cost. The difference between the purchase price and the cost of sales represents irreversible costs. The latter are losses and are not taken into account in the decision-making process.
It is also necessary to distinguish between averages and marginalcosts. Average costs are determined by dividing the total cost of production. Obviously, a company can not sell goods at a cost below average costs, because then it will simply go bankrupt. Thus, average costs are an important indicator of the work of the enterprise.
The average and marginal costs of production are interrelated. When the value of the first reaches a minimum, they must be equal to the second.
For this reason, the adoption of any economic decisions must be accompanied by marginal, or limiting, analysis.
Assess inefficiencies and effectivenessalternative solutions can be based on limit comparisons that involve estimating increments in the limit, that is, at the boundary of the change in specific quantities. The nature of economic decisions basically determines what the marginal cost will be, whether the increments of costs will be negative or positive.
As already noted, marginal costs in the formin many respects similar to the marginal utility, where the additional usefulness of the good is meant. Therefore, all limit values can be evaluated as differential concepts, because in this case we are talking about incrementing additional values (costs, utility, etc.).
Thus, marginal costs arethe opportunity for the firm to forecast a competitive offer of its product. To do this, we must compare the marginal cost curve and the supply curve. The maximum profit will be achieved at the point where the supply curve and the equilibrium market price line intersect.
