Marginal Cost Remember Marginal Cost The change in total cost generated by producing one more unit of output Easiest to calculate if data on total cost are available in increments of one unit of output ID: 722797
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Slide1
Marginal Cost and Average CostSlide2
Marginal Cost
Remember Marginal Cost?
The change in total cost generated by producing one more unit of output
Easiest to calculate if data on total cost are available in increments of one unit of outputSlide3
Marginal Cost
Selena’s Gourmet Salsa produces bottled salsa
The table above shows the costs per day based on the number of cases of salsaSlide4
Marginal Cost
The significance of the slop of the total cost curve is shown by the fifth column – marginal cost of case
The general formula for marginal cost:Slide5
Marginal Cost
Like marginal product, the marginal cost is equal to “rise” (increase in total cost) divided by “run” (the increase in the quantity of output)
Marginal product is = to the slope of the total product curve
Marginal cost is = to the slope of the total cost curveSlide6
Marginal Cost
The total cost curve slopes upward and gets steeper as we move it to the right
The marginal cost curve also slopes upward , which reflects diminishing returns to the variable inputSlide7
Marginal Cost
Remember, as output increases, the marginal cost of output also increases because the marginal product of the variable input decreasesSlide8
Average Cost
Average total cost is referred to as average cost and it is total cost divided by quantity of output produced
ATC = TC/Q = (Total Cost) / (Quantity of Output)Slide9
Average Cost
Average total cost is in important because it tells the producer how much the average or typical unit of output costs to produce
Marginal cost tells the producer how much one more unit of output costs to produceSlide10
Average Cost
What is the total cost of producing 4 cases of salsa?Slide11
Average Cost
The average total cost curve has a U shape that corresponds to how average total cost first falls and then rises as output increasesSlide12
Average Cost
U-shaped average total cost curve falls at low levels of output then rises at higher levels
Economics believe that the U-shaped average total cost curve are the norm for producers in many industriesSlide13
Average Cost
Why is it U-shaped though?
Depends on average fixed cost and average variable cost
Average fixed cost (AFC) is fixed cost divided by the quantity of output (also known as the fixed cost per unit of output)
AFC
=Fixed cost
=
FC
Quantity
of output
QSlide14
Average Cost
Average fixed cost (AFC) is fixed cost divided by the quantity of output (also known as the fixed cost per unit of output)
Average variable cost (AVC) is variable cost divided by the quantity of output, also known as variable cost per unit of output
AFC
=
Fixed cost
=
FC
Quantity
of output
Q
AVC
=
Variable
cost
=
VC
Quantity
of output
QSlide15
Average Cost
ATC is the sum of average fixed cost and average variable cost, it has a U shape because they move in opposite direction as output rises
The relationship between the two is as more output is produced, the fixed cost is spread over more units of output; the end result is that the fixed cost per unit of output (average fixed cost) fallsSlide16
Average Cost
AVC rises as output increases
Each additional unit of output incurs more variable cost to produce than the previous unit
Increases output
has
two opposing effects on average total costSlide17
Average Cost
“The spreading effect” – the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost
At low levels of output, the spreading effect is very powerful because even small increases in output cause large reductions in average fixed cost.
At low levels of output, the spreading effect dominates the diminishing returns effect and causes the average total cost curve to slope downward
When output is large, average fixed cost is already small and so increases output further has only a very small spreading effectSlide18
Average Cost
“The diminishing returns effect” – the larger the output, the greater the amount of variable input required to produce additional units, leading to a higher average variable cost
Diminishing returns usually only grow increasingly important as output rises
When output is large, the diminishing returns effect dominates the spreading effect, causing the average total cost curve to slope upwardSlide19
Marginal Cost slopes upward –result of diminishing returns
AVC also slopes upward due to diminishing returns, but is flatter than the MCSlide20
Minimum Average Total Cost
For a U-shaped ATC curve, ATC is at its minimum level at the bottom of the U
The quantity of output that corresponds to the minimum ATC is the minimum-cost output
Minimum-cost output is the quantity of output at which average total cost is lowest – the bottom of the U-shaped average total cost curveSlide21
Minimum Average Total Cost
Principles that are true for a firm’s MC and ATC curves:
At M-Cost Output,
ATC is = to MC
At output less than the
M-Cost Output, MC is less than ATC and ATC is fallingAnd at output greater than the M-Cost Output, MC is greater than ATC and ATC is risingSlide22
Minimum Average Total Cost
The MC curve must cut
through the ATC curve at
the minimum ATC (point M)
corresponding to the
minimum-cost outputWhat if MC is different from ATC?If MC is less than the ATC, an increase in output must reduce ATCIf MC is greater than ATC, an increase in output must increase ATCSlide23
Does MC Curve also Slope Upward?
Economists say NO!
MC curves often slope downward as a firm increases it production from zero up to some low level, sloping upward only at higher levels of production
This initial downward slope occurs because a firm that employs only a few workers often cannot reap the benefits of specialization of labor. This specialization can lead to
increasing
returns at first, and so to a downward-sloping marginal cost curve. Once there are enough workers to permit specialization, however, diminishing returns set in.Slide24
Does MC Curve also Slope Upward?
A realistic MC curve has a “swoosh” shape
Starting from a
very low output level,
MC often falls as the
firm increases outputWhy? Hiring more workers allows greater specialization of their tasks and leads to increasing returnsOnce specialization is achieved, diminishingreturns to additional workers sets in and MC rises.Slide25
Marginal Cost and Average Cost NotesSlide26
Marginal Cost
Remember Marginal Cost?
Easiest to calculate if data on total cost are available in increments of one unit of outputSlide27
Marginal Cost
Selena’s Gourmet Salsa produces bottled salsa
The table below shows the costs per day based on the number of cases of salsaSlide28
Marginal Cost
The significance of the slop of the total cost curve is shown by the fifth column – marginal cost of case
The general formula for marginal cost:Slide29
Marginal Cost
Like marginal product, the marginal cost is equal to “rise” (________________) divided by “run” (_____________________________)
Marginal product is =
Marginal cost is = Slide30
Marginal CostSlide31
Marginal Cost
Remember, as output increases, the marginal cost of output also increases because the marginal product of the variable input decreasesSlide32
Average Cost
Average total cost is referred to as average cost and it is total cost divided by quantity of output producedSlide33
Average Cost
Average total cost is in important because it tells the producer how much the average or typical unit of output costs to produce
Marginal cost tells the producer how much one more unit of output costs to produceSlide34
Average Cost
What is the total cost of producing 4 cases of salsa?Slide35
Average Cost
The average total cost curve has a U shape that corresponds to Slide36
Average Cost
U-shaped average total cost curve falls at low levels of output then rises at higher levels
Economics believe that the U-shaped average total cost curve are the norm for producers in many industriesSlide37
Average Cost
Why is it U-shaped though?
Average fixed cost (AFC) is fixed cost divided by the quantity of output (also known as the fixed cost per unit of output)Slide38
Average Cost
Average fixed cost (AFC) is fixed cost divided by the quantity of output (also known as the fixed cost per unit of output)
Average variable cost (AVC) is variable cost divided by the quantity of output, also known as variable cost per unit of outputSlide39
Average Cost
ATC is the sum of average fixed cost and average variable cost, it has a U shape because
The relationship between the two is as more output is produced, the fixed cost is spread over more units of output; the end result is that the fixed cost per unit of output (average fixed cost) fallsSlide40
Average Cost
AVC rises as output __________
Each additional unit of output incurs more variable cost to produce than the previous unit
Increases output has two opposing effects on average total costSlide41
Average Cost
“__________________” – the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost
At low levels of output, the spreading effect is very powerful because even small increases in output cause large reductions in average fixed cost.
At low levels of output, the spreading effect dominates the diminishing returns effect and causes the average total cost curve to slope downward
When output is large, average fixed cost is already small and so increases output further has only a very small spreading effectSlide42
Average Cost
“_______________________” – the larger the output, the greater the amount of variable input required to produce additional units, leading to a higher average variable cost
Diminishing returns usually only grow increasingly important as output rises
When output is large, the diminishing returns effect dominates the spreading effect, causing the average total cost curve to slope upwardSlide43Slide44
Minimum Average Total Cost
For a U-shaped ATC curve, ATC is at its minimum level at the bottom of the U
The quantity of output that corresponds to the minimum ATC is the minimum-cost output
Minimum-cost output is the quantity of output at which average total cost is lowest – the bottom of the U-shaped average total cost curveSlide45
Minimum Average Total Cost
Principles that are true for a firm’s MC and ATC curves:
At M-Cost Output,
At output less than the
M-Cost Output,
And at output greater than the M-Cost Output, MC is greater than ATC and ATC is risingSlide46
Minimum Average Total Cost
The MC curve must cut
through the ATC curve at
the minimum ATC (point M)
corresponding to the
minimum-cost outputWhat if MC is different from ATC?Slide47
Does MC Curve also Slope Upward?
Economists say NO!
MC curves often slope downward as a firm increases it production from zero up to some low level, sloping upward only at higher levels of production
This initial downward slope occurs because a firm that employs only a few workers often cannot reap the benefits of specialization of labor. This specialization can lead to
increasing
returns at first, and so to a downward-sloping marginal cost curve. Once there are enough workers to permit specialization, however, diminishing returns set in.Slide48
Does MC Curve also Slope Upward?
A realistic MC curve has a “swoosh” shape
Starting from a
very low output level,
MC often falls as the
firm increases outputWhy? Once specialization is achieved, diminishingreturns to additional workers sets in and MC rises.