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Activity Number 5: Explain The Difference Between Marginal Cost and Incremental Cost

Marginal cost is the change in total cost from producing one additional unit of output, while incremental cost is the change in total cost from a specific management decision like introducing a new product. Not all costs are opportunity costs, as some costs are outside of our control, but implicit costs are a type of opportunity cost since they represent forgone benefits from alternative choices. Marginal cost must generally be positive since inputs have positive prices and hiring additional labor has a positive wage rate, though it is theoretically possible in a world without scarcity for marginal cost to become negative.

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67 views2 pages

Activity Number 5: Explain The Difference Between Marginal Cost and Incremental Cost

Marginal cost is the change in total cost from producing one additional unit of output, while incremental cost is the change in total cost from a specific management decision like introducing a new product. Not all costs are opportunity costs, as some costs are outside of our control, but implicit costs are a type of opportunity cost since they represent forgone benefits from alternative choices. Marginal cost must generally be positive since inputs have positive prices and hiring additional labor has a positive wage rate, though it is theoretically possible in a world without scarcity for marginal cost to become negative.

Uploaded by

MarkJoven Bergantin
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ACTIVITY NUMBER 5

1. Explain the difference between marginal cost and incremental cost


- Economists define Marginal Cost as the change in the total cost that arises
when the quantity produced is incremented by one unit. Simply put it as the cost
of producing one more unit of a good. In addition, marginal cost is the change in
the total cost associated with a change in total output. We shouldn’t be fooled to
think that it is the same thing as the cost of producing the last unit of output.
Costs that are included in marginal cost are those that vary with the level of
production. The formula for Marginal Cost is written as: MC = dTC/dQ =
dTVC/dQ. Moving on to Incremental Cost, it is defined as the total cost incurred
due to an additional unit of product being produced. It is calculated by analyzing
the additional expenses involved in the production process for one additional unit
of product. An example would be an introduction of a new product in the firm.
Although quite similar, marginal cost and incremental cost have some
differences. One of which is that the first one is the change in total cost given a
change in output while the latter is the change in the firm’s total cost that result
from the implementation of decisions made by management. So basically,
Marginal Cost is the more general concept of Incremental Cost.

2. Marginal cost is the cost of producing the “last” unit of output. Do you
agree or not? Explain
- In contrast to what we believe as conventional, the cost of producing the “last”
unit of output is not the same thing as Marginal Cost. Reason being, the cost of
producing the last unit of output is the same as the per-unit cost of producing
any other level of output since it is the total cost that is changing. We should
remember that Marginal Cost is actually change in the total cost associated with
a change in total output so it is not the actual per unit price of the output. In
addition, we should take into consideration that the purpose of analyzing
marginal cost is to be able to determine the point in which a firm can achieve
economies of scale to optimize production and overall operations.

3. All costs are opportunity costs. Do you agree? Explain


- As an accounting and economic student, most of the problems that we tend to
analyze and study are related to cost, but what is it really? Cost is a vague
subject in which all human beings can relate to. The most successful people in
our time and prior to it are those who are most influenced by it. Some would say
that their lives revolve around how to minimize cost in order to achieve greater
income. But cost isn’t just measured by monetary means no, it can actually be
the opportunity given up when choosing or making a decision. This is where
Opportunity cost plays a role. It is defined as the cost incurred by not enjoying
the benefit associated with the best alternative choice. In addition, it also
represents the potential benefits an individual misses out when choosing one
alternative over another. It is simply the benefit forgone when choosing an
alternative. Some economists would argue that “All costs are ultimately an
opportunity cost.” Personally, I disagree with the statement. My reason is simple,
the term “Cost” is much vaster when compared to Opportunity cost. I would say
that Opportunity cost is under the term Cost. This is because we don’t only
accumulate cost when choosing an alternative but also when a fortuitous event
happens which is not within our control, we tend to accrue costs.

4. Only implicit costs are opportunity costs. Do you agree with this
statement? If not, then why not?
- Implicit Cost is a cost that exists without the exchange of cash and it is not
recorded for accounting purposes. From the name itself which indicates “Inside”.
It occurs when a company uses their asset instead of renting or buying it. It
represents the loss of income but not he loss of profit. We should remember that
it is contrast to explicit costs as the latter represent money exchanged or the use
of tangible resources by a company. In general, one would consider that Implicit
cost is under Opportunity cost. The reason being, opportunity cost is the benefit
forgone when choosing one alternative from another and implicit cost occurs
when the company chooses to use its own asset rather than buying or renting
one. Now with the statement “Only implicit costs are opportunity costs” is a
statement that I do not agree with. The reason is simple, Implicit cost is just
one of the costs that are under opportunity costs. We do not accumulate
Opportunity cost with just this but also with explicit costs and etc.

5. Since the prices of productive inputs must always be positive, and


since the cost of hiring another unit of, say labor, is the wage rate, it
must also be true that marginal cost of producing one more unit of
output must also be positive. Do you agree? Explain.
- Quoting a character from a blockbuster movie that I rematched a couple of times,
Thanos; “Balance, as all thing should be.” is a statement that is most related to
the field in which I chose to battle in, accounting. It goes without saying that we
must utilize scarce resources in order to generate profit and decrease cost and
expenses for our firm. This just means that we have to minimize the costs our
firm accrues in order to be able to generate profit to fund our short term and
long-term operations and continue operating. With regards to marginal cost,
since it is the change in the total cost accrued when making or producing one
additional unit, we tend to minimize it up to the point in which it equals the
marginal revenue because remember that having revenue is the main goal of a
business. That being said, the instance where marginal cost becomes negative is
near to being fictious as it will only happen to a world where scarcity does not
exist and all resources available to men are infinite together with their capacity to
generate resources to enjoy said goods and services.

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