Average cost is total cost divided by output. A marginal-style change is the extra total cost of producing extra units, divided by the extra units. Both are quick calculations from a table, but they answer different questions, and the exam skill is choosing the right one. Check the current syllabus on the Cambridge page to see which of these your exam year expects you to calculate rather than only describe.
This lesson builds on fixed, variable and total costs, so sort your costs first.
How do the two measures work, step by step?
Average cost = total cost ÷ output. It answers: what does each unit cost on average, including a share of fixed costs?
Extra cost per additional unit = change in total cost ÷ change in output. It answers: what did the additional output cost?
- Write down the two output levels and their total costs.
- For average cost, divide each total by its own output.
- For extra cost, subtract the totals, subtract the outputs, then divide.
- Label every answer with its unit (RM per loaf).
Worked example
Mawar Bakery (a fictional shop) has fixed costs of RM3,000 and variable costs of RM1.50 per loaf.
| Loaves | Total cost (RM) | Average cost (RM per loaf) |
|---|---|---|
| 1,000 | 4,500 | 4,500 ÷ 1,000 = 4.50 |
| 2,000 | 6,000 | 6,000 ÷ 2,000 = 3.00 |
| 3,000 | 7,500 | 7,500 ÷ 3,000 = 2.50 |
| 4,000 | 9,000 | 9,000 ÷ 4,000 = 2.25 |
Extra cost from 2,000 to 3,000 loaves: change in total cost = 7,500 − 6,000 = RM1,500. Change in output = 1,000. So the extra cost is 1,500 ÷ 1,000 = RM1.50 per extra loaf.
Notice that average cost falls (3.00 to 2.50) while the extra cost stays at RM1.50. Average cost falls because the RM3,000 of fixed cost is spread over more loaves. The extra cost is just the variable cost of one more loaf, since fixed cost did not change.
The mistake to watch for
Mistaken answer: “The extra cost from 2,000 to 3,000 loaves is RM1,500 ÷ 3,000 = RM0.50.”
The student divided the change in cost by the new total output instead of by the change in output. The extra RM1,500 came from only 1,000 extra loaves. Always subtract the outputs first.
A second common slip is to report average cost when the question asks for the extra cost, so underline the wording before calculating.
Check yourself
1. A fictional firm’s total cost is RM1,625 at 250 units. Find average cost.
Show answer
1,625 ÷ 250 = RM6.50 per unit.
2. Total cost is RM1,400 at 200 units and RM1,900 at 300 units. Find the extra cost per additional unit and the average cost at 300 units.
Show answer
Extra cost = (1,900 − 1,400) ÷ (300 − 200) = 500 ÷ 100 = RM5 per extra unit. Average cost at 300 = 1,900 ÷ 300 = RM6.33 (to two decimal places).
3. Total cost rises from RM12,000 at 400 units to RM12,600 at 450 units. Find the extra cost per additional unit.
Show answer
(12,600 − 12,000) ÷ (450 − 400) = 600 ÷ 50 = RM12 per extra unit.
Where this leads next
Falling or rising average cost needs an explanation, which is the job of the next lesson, economies and diseconomies using a case. The ratio interpretation tool can help you check per-unit divisions.
When a table of figures is followed by “explain”, students often calculate correctly and then write nothing about cause. Our online one-to-one Economics tuition practises joining the number to the reason.