Average Cost:

Average cost refers to the cost per unit of output produced. It is calculated by dividing the total cost by the total quantity of output. Average cost represents the average expenses incurred in producing each unit of a good or service. It helps in understanding the efficiency and profitability of a production process.

Marginal Cost:

Marginal cost is the additional cost incurred in producing one extra unit of output. It is calculated by dividing the change in total cost by the change in quantity produced. Marginal cost represents the cost of producing an additional unit and provides insights into the cost of increasing or decreasing production.

Differences:

1. Concept:
- Average cost is the total cost divided by the total quantity of output, representing the average cost per unit.
- Marginal cost is the change in total cost divided by the change in quantity produced, representing the cost of producing one additional unit.

2. Calculation:
- Average cost is calculated by dividing the total cost by the total quantity of output.
- Marginal cost is calculated by dividing the change in total cost by the change in quantity produced.

3. Focus:
- Average cost focuses on the overall efficiency and profitability of the production process.
- Marginal cost focuses on the cost of producing one additional unit and helps in decision-making regarding production levels.

4. Interpretation:
- Average cost helps in determining the breakeven point, as it provides insights into the minimum price at which goods or services should be sold to cover the average cost.
- Marginal cost helps in determining the optimal level of production, as it compares the additional cost of production with the additional revenue generated.

5. Relationship:
- Average cost decreases as production increases due to economies of scale.
- Marginal cost initially decreases due to economies of scale but eventually increases due to diminishing returns.

6. Application:
- Average cost is useful for cost control, pricing decisions, and long-term planning.
- Marginal cost is useful for short-term decision-making, such as determining the optimal level of production and evaluating the profitability of producing additional units.

In summary, average cost provides an overall view of the cost per unit, while marginal cost focuses on the additional cost of producing one more unit. Both measures have their own significance in understanding costs and making informed decisions.