Variable Costs vs Marginal Cost
Variable Costs and Marginal Cost are two Production & Costs concepts in AP Economics that students often mix up. Variable Costs are costs that change directly with the level of output in the short run. Marginal Cost is the additional cost incurred by producing one more unit of output. Here is how they compare side by side.
These include expenses like wages for hourly workers, raw materials, and utilities that increase as more output is produced and fall when output decreases.
It is calculated as the change in total cost divided by the change in quantity. Marginal cost typically decreases at first due to increasing marginal returns, then rises due to diminishing returns.
Variable Cost vs Marginal Cost: A Running Total and a Rate of Change
| Variable Costs | Marginal Cost | |
|---|---|---|
| What it measures | The combined cost of every input that changes with output | The extra cost of producing one more unit |
| Units | Dollars | Dollars per unit |
| How you get it | Total cost minus fixed cost | Change in total cost divided by change in quantity |
| Value at zero output | Zero, because nothing variable has been used yet | Not defined, because no extra unit has been made |
| Path as output rises | Always climbing, first gently and then steeply | Dips first, then turns upward once diminishing returns bite |
| Link to the other | The sum of every marginal cost paid so far | The slope of the variable cost curve |
| Use in the output decision | Compared with revenue to decide whether to stay open | Compared with marginal revenue to decide the next unit |
Marginal cost is the slope of the variable cost curve, not a slice of it
Variable cost is a running total, and marginal cost is the step between one entry in that total and the next. Take a firm with fixed cost of 40. Suppose its total variable cost reads 0, 30, 50, 66, 90 and 130 as output goes from zero units to five. The steps between those figures are 30, 20, 16, 24 and 40, and those five steps are the marginal costs. Add them up: 30 plus 20 plus 16 plus 24 plus 40 gives 130, which is exactly variable cost at five units. Total cost there is 40 plus 130, or 170, so average total cost is 34 and average variable cost is 26. Watch what the two series do. Marginal cost falls over the first three units while each extra worker adds more output than the one before, then rises once the law of diminishing marginal returns takes hold. Variable cost never falls at all; it simply grows slowly and then quickly. A student who writes that variable cost drops at low output has confused the total with its slope, which is one of the most common errors on cost questions. The paired columns at /micro/production-costs are set out so you can watch a total and its step size move together.
Fixed cost cancels out of marginal cost, so it cannot change how much you make
Marginal cost is a difference between two totals, and fixed cost sits in both of them, so it disappears in the subtraction. Using the schedule above, total cost at three units is 40 plus 66, or 106, and at four units it is 40 plus 90, or 130. The gap is 24, the same answer you get from the variable column alone, since 90 minus 66 is also 24. Now double the fixed cost to 80. The two totals become 146 and 170, and the gap is still 24. That is why a firm which has already signed a lease should leave the rent out of its output decision. The rent changes profit and it changes average total cost, but it does not change what the next unit costs, and the next unit is the only thing marginal cost prices. The firm then sets that number against marginal revenue and keeps expanding while revenue from the extra unit is the larger of the two. Fixed cost still governs two other questions: whether total revenue covers total cost over the long run, and whether the owner would sign the lease again. Neither is answered by the marginal column. The step by step arithmetic is laid out at /calculate/marginal-cost.
Frequently asked questions
Is marginal cost the same as variable cost?
No, marginal cost is the extra cost of one more unit while variable cost is the total spent on every unit made so far. Marginal cost is measured in dollars per unit and variable cost in dollars, and adding the marginal costs from the first unit onward reproduces total variable cost.
Do fixed costs affect marginal cost?
No, fixed costs drop out of marginal cost entirely, since they are identical at both output levels being compared and cancel in the subtraction. A rent increase therefore raises total cost and average total cost while leaving the marginal cost curve exactly where it was.
Why does marginal cost fall and then rise?
Marginal cost falls while each added worker produces more than the previous one and rises once each added worker produces less. With one variable input, marginal cost equals the wage divided by marginal product, so it moves in the opposite direction to marginal product.
Live Production Costs graph. Drag the curves, or open the full version.
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