Comparison · Break-Even
Marginal Cost vs Average Cost: The Difference
Marginal cost and average cost compared on one cost schedule: what each measures, why the average bottoms out where marginal cost crosses it, and which one to use for a pricing decision.
Next unit vs every unit Short answer
marginal cost is what the next units add to total cost; average cost is total cost divided by all units made so far
Both numbers come from the same total cost, but they answer different questions. Average cost asks what one unit costs when the whole period's cost is shared out. Marginal cost asks what producing more would add. A business with high fixed costs can have an average cost far above its marginal cost, which is why an extra order at a modest price can still be worth taking — and why pricing everything at that modest price would not cover the rent.
| Marginal cost | Average cost | |
|---|---|---|
| Formula | Change in total cost ÷ change in output | Total cost ÷ output |
| Includes fixed costs? | Only those that change with the step | All of them, spread over every unit |
| Answers | Is an extra order or batch worth it? | Does the price cover the full cost? |
| Typical decision | Special orders, overtime, an extra shift | List prices, product profitability |
One schedule, two measures
The hypothetical schedule below starts with $2,000 of fixed cost. Marginal cost is shown per unit for each step of 100 units. While marginal cost is below the average, every step pulls the average down. Between 600 and 700 units overtime pushes marginal cost to $10, above the $9 average, and the average turns up. The average is lowest at 600 units, the point where marginal cost crosses it.
| Output | Total cost | Marginal cost per unit (last 100) | Average cost per unit |
|---|---|---|---|
| 100 | $2,600 | $6.00 | $26.00 |
| 200 | $3,100 | $5.00 | $15.50 |
| 300 | $3,550 | $4.50 | $11.83 |
| 400 | $4,050 | $5.00 | $10.13 |
| 500 | $4,650 | $6.00 | $9.30 |
| 600 | $5,400 | $7.50 | $9.00 |
| 700 | $6,400 | $10.00 | $9.14 |
Marginal cost
- Use it for: One-off decisions with spare capacity: a special order, a rush batch, whether to run overtime.
- Watch out for: It ignores fixed costs that do not change with the step, so it can never be the price floor for all sales.
Average cost
- Use it for: Regular prices and product profitability, where every unit must carry its share of fixed cost.
- Watch out for: It is only valid at the volume it was calculated for; fixed cost per unit rises when volume falls.
Price the business on average cost at a realistic volume; judge an extra order on its marginal cost, as long as it does not displace full-price sales.
Worked decision: at 600 units a customer offers $8.50 a unit for 100 more. That is below the $9 average, but the extra 100 would cost $10 each because of overtime — the order loses $150. Had the business been at 400 units, the next 100 would have cost $6 each and the same order would have added $250. The price did not change; the marginal cost did.
Method references: OpenStax: Costs in the Short Run; OpenStax: Basic Cost Behavior Patterns. Checked October 26, 2026. The schedule is hypothetical.
Related calculators & guides
Report an error
Thank you! Your feedback helps us make this page better.
Could not send. Please try again.