Question

How does fixed cost affect marginal cost? Why is this relationship important?

Short answer

The marginal cost is unaffected by fixed costs.

Step-by-step solution

Step 1. Introduction

The term "marginal cost" refers to a cost that is distinct from both the average total cost and the average variable cost. It is the cost of creating an additional unit of production. As a result, it is simply the cost per unit of the next item being produced, not the cost per unit of all units being produced (or next few).

Fixed Costs: These are costs that stay constant regardless of output volume.

Step 2. Explanation

Total cost is defined as the sum of all costs, which includes both fixed and variable costs.$FC+VC=TC$

These variable costs will rise as enterprises create more product. Fixed costs do not alter marginal cost since marginal cost is the cost of generating one additional unit of output, and variable costs vary with changes in production.

Increased output has no effect on fixed costs. The marginal cost will not change if fixed costs rise.

As a result, fixed costs have no bearing on marginal costs.

However, because marginal cost is computed on the basis of total cost, and total cost is generated by adding fixed and variable costs, understanding their connection is critical.

So, if we only had the overall cost, we can figure out the marginal cost.