# Relationship between total, average, and margin

Describe the relationship between total, average, and marginal concepts and how these measures are important to optimization analysis

To illustrate the relationship it highly recommend to provide an actual example such case study for particular firm, or particular economic.

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#### Solution Preview

Let us use cost as an example. I will example total cost, average cost, and marginal cost.

Cost

Total cost = fixed cost + variable. Intuitively, it means that say you want to produce 1000 units of products, how much in total will it cost?

Average cost = Total Cost/Quantity. It means at the 1000 unit production level, how much, on average, does one unit cost. Average cost should be less than price, otherwise your firm will suffer from a loss.

Marginal cost = d(TC)/dQ. It is the slope of TC. Intuitively, it means that at some production level (say 1000 units), what is the cost to produce one additional unit? Note: The cost of producing one additional unit will not necessarily be the same at different production levels.

Example: You own a restaurant, and you hire chefs. Let us say that the first chef can produce 20 meals per hour. If you hire one more chef, the second guy only produces 18 meals per hour ...