Costs of the Construction Firm - Construction Economics: A New Approach - page 110

Marginal Cost
To highlight precisely when average costs reach their lowest point, economists are
very interested in the principle of marginal cost . As we discussed earlier in this
chapter in the section on diminishing returns, the term marginal means additional
or incremental. In our previous example set out in Table 7.1, we considered the
marginal physical product - that is, the additional output associated with taking on
successive units of labour - and the marginal costs of that additional output. For
convenience the data of Table 7.1 is reproduced in Table 7.3 together with columns
setting out the marginal costs and average variable costs. These are calculated using
the same assumptions - that each unit of labour costs £500 per week and that these
are the only costs that alter - and the same method as on page 105. For example,
when the second unit of labour is hired, costing £500, output increases by 40. Thus,
the marginal cost is £12.50 (£500 ÷ 40) per square metre
Remember we find marginal cost by subtracting the total cost of producing all
but the last unit(s) from the total cost of producing all units including the last one,
and dividing the result by the additional output produced by the last unit. Marginal
cost can be measured, therefore, by using the formula:

marginal cost = change in total cost

change in output

Table 7.3 Marginal and average costs

In the first column, we give the number of workers used per week on a project. In the
second column, we give their total product; that is, the output that each specified
number of workers can produce in terms of square metres. The third column gives the
marginal product. The marginal product is the difference between the output possible
with a given number of workers minus the output made possible with one less worker.
In the fourth and fifth columns we calculate the marginal costs and average costs per
square metre - assuming that each worker is paid £500 a week. For example, the
marginal product of a fourth worker is 20 square metres, because with four workers,
140 square metres are produced, but with three workers only 120 are produced. The
difference is 20. The marginal cost, therefore, is £25 (£500 ÷ 20), and the average
variable cost at the same point is £14.29 (£2,000 ÷ 140).

Total product
(output in
sq. m per week)

Marginal physical
product (in sq. m
per week)

Input
of labour

Marginal cost
(£/sq. m)

Average cost
(£/sq. m)

0
1

0
20

0
25.00
16.67
12.50
14.29
16.67

20
40
60
20
10
10

25.00
12.50
8.33
25.00
50.00
50.00

2
3
4

60
120
140
150

5
6
7
8

160
165
163

18.75
21.21
24.54

5
-2

100.00
-250.00