Question

2- Why is the difference between marginal cost and (long run) average cost (of pharmaceuticals) important in the political discussions about whether drugs are over-priced?

Answer 1

ANSWER:

Average Cost vs Marginal Cost:
Average costs are calculated using total costs of production, while marginal costs considers the cost of one additional unit.
Marginal and Average Costs:
Marginal and Average costs are related but different.

• The price of goods are determined by their marginal value. In a competitive economy, price will equal marginal cost.
• Economics assumes that a rational decision - maker will produce or consume whenever the marginal benefits of the good outweigh the marginal costs.
• A company has a fixed per person cost of A for a perishable good. If no one is willing to spend A before the good expires, should the company accept a lower price of B? The answer is yes, so long as the marginal costs of the good is covered, then the company will make some profit.

TERMS

Average Cost:
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced.

Marginal cost:
The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output. Additional cost associated with producing one more unit of output.

Marginal analysis:
The process of making a decision by weighing the incremental effects on costs and benefits.

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