Marginal Product and Marginal Cost - 1.cdn.edl.io · PDF fileFigure 5 Thirsty Thelma’s Average-Cost and Marginal-Cost ... – Total Fixed Costs (TFC) – Total Variable Costs

Marginal Product and Marginal Cost

4. 3rd (decreases from 10, 15 to 11)

5. Greater than – a higher MP will increase TP and thus increase APP

6. No, neither output or labor can be negative

7. Yes, if an additional worker disrupts production, TP will decrease.

8. Positive – if MP is positive, each additional worker is still adding to TP

9. Negative. If MP is negative, TP will decrease. No firm would ever hire an additional worker if they caused TP to fall. Even when MP is diminishing, each worker will still increase TP, just at a lower rate.

10. When MP is positive, then TP will increase. When MP is negative, then TP will fall.

11. MP>AP, then AP will rise. MP<AP, then AP will fall.

12. At L2 (after L1), MP falls

13. Greater than – increasing MP increase TP

14. Less than – decreasing MP decreases TP

15. APP = MPP

16. Not true, between L1 and L2, MMP is decreasing but APP is still increasing bc MMP > APP

17. Less than

18. Greater than19. MC = AVC since when MC > AVC, AVC increases

and when MC < AVC, AVC decreases

20. Not true, between Q1 and Q2, MC is increasing but AVC is still increasing bc MC <AVC

21. Decrease – workers are more productive due to

specialization; greater productivity will lower

costs

22. Increase – MP decreases due diminishing

marginal returns; lower productivity will increase

costs.

23. L1 since productivity (MPP) is maximized

24. Decrease - when output increases, costs will fall

25. Increase – when output falls, costs will rise

26. Maximized at L2Q2 bc APP is at its highest.

Production Costs KEYQ of Labor vOutput MP

1 110 110

2 200 903 270 70

4 300 305 320 20

6 330 10

1. a. Fixed: shop, machines, refrigerators.

Variable: mix, cups, toppings, workersb. See graphc. Diminishing marginal returns

(not enough resources to go around)

2.

0

50

100

150

200

250

300

350

0 1 2 3 4 5 6 7

#1

0

100

200

300

400

500

600

700

800

0 50 100 150 200 250 300 350

#2

VC TC

Q of Labor Output FC VC-W VC-I VC TC MC

0 0 100 0 0 0 1001 110 100 80 55 135 235 $1.23

2 200 100 160 100 260 360 $1.393 270 100 240 135 375 475 $1.64

4 300 100 320 150 470 570 $3.175 320 100 400 160 560 660 $4.50

6 330 100 480 165 645 745 $8.50

MC=

Change in Total Costs

Change in Output

From 0 to 1 worker: TC: 235-100 = $1.23Q: 110

Q of Cars TC FC VC AVC ATC AFC MC

0 500,000 500,000 01 540,000 500,000 40,000 40,000 540,000 500,000 40,0002 560,000 500,000 60,000 30,000 280,000 250,000 20,000

3 570,000 500,000 70,000 23,333 190,000 166,667 10,0004 590,000 500,000 90,000 22,500 147,500 125,000 20,000

5 620,000 500,000 120,000 24,000 124,000 100,000 30,0006 660,000 500,000 160,000 26,667 110,000 83,333 40,000

7 720,000 500,000 220,000 31,429 102,857 71,429 60,0008 800,000 500,000 300,000 37,500 100,000 62,500 80,0009 920,000 500,000 420,000 46,667 102,222 55,556 120,000

10 1,100,000 500,000 600,000 60,000 110,000 50,000 180,000

0

100,000

200,000

300,000

400,000

500,000

600,000

0 1 2 3 4 5 6 7 8 9 10

Chart Title

AVC ATC MC

3. Fixed Cost = $500,000

Min ATC = $100,000 �� 8 cars

4. Skipped

5. a. ATC = $40/4 =$10

b. $40 + 5 = $45 $45/5 = $9

ATC will decrease since MC <ATC

c. $40 + $20 = $60 $60/5 = $12

ATC will increase since MC > ATC

MC

ATC

MC crosses ATC at its minimum

AFC decreases dues to the spreading effect

Figure 5 Thirsty Thelma’s Average-Cost and Marginal-Cost Curves

Copyright © 2004 South-Western

Costs

$3.50

3.25

3.00

2.75

2.50

2.25

2.00

1.75

1.50

1.25

1.00

0.75

0.50

0.25

Quantity

of Output(glasses of lemonade per hour)

0 1 432 765 98 10

MC

ATC

AVC

AFC

• Total Costs

– Total Fixed Costs (TFC)

– Total Variable Costs (TVC)

– Total Costs (TC)

– TC = TFC + TVC

• Average Costs

– Average Fixed Costs (AFC)

– Average Variable Costs (AVC)

– Average Total Costs (ATC)

– ATC = AFC + AVC

Quantity

Co

sts

(d

ollars

)

AFC

AVC

ATC

Per-Unit Costs

121110987654321

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

MC of the 11th unit?

ATC of the 11th unit?

AVC of the 11th unit?

Min ATC?

TC of 11 units?

MC

(C)

$6 (ATC) x 20 = 120TC = 120

$6 (ATC) - $5 (AVC)= $1 x 20TFC= 20

At output Q, what area

represents:

TC

VC

FC

0CDQ

0BEQ

0AFQ or BCDE

64

Shifting Cost Curves

65

Shifting Costs Curves

TP VC FC TC MC AVC AFC ATC

0 0 100 100 - - - -

1 10 100 110 10 10 100 110

2 16 100 116 6 8 50 58

3 21 100 121 5 7 33.3 30.3

4 26 100 126 3 6.5 25 31.5

5 30 100 130 4 6 20 26

6 36 100 136 6 6 16.67 22.67

7 46 100 146 10 6.6 14.3 20.9

What if fixed costs increase to $200

66



0 0 100 100 - - - -

1 10 100 110 10 10 100 110

2 16 100 116 6 8 50 58

3 21 100 121 5 7 33.3 30.3

4 26 100 126 5 6.5 25 31.5

5 30 100 130 4 6 20 26

6 36 100 136 6 6 16.67 22.67

7 46 100 146 10 6.6 14.3 20.9

67



0 0 200 100 - - - -

1 10 200 110 10 10 100 110

2 16 200 116 6 8 50 58

3 21 200 121 5 7 33.3 30.3

4 26 200 126 5 6.5 25 31.5

5 30 200 130 4 6 20 26

6 36 200 136 6 6 16.67 22.67

7 46 200 146 10 6.6 14.3 20.9

68



0 0 200 200 - - - -

1 10 200 210 10 10 100 110

2 16 200 216 6 8 50 58

3 21 200 221 5 7 33.3 30.3

4 26 200 226 5 6.5 25 31.5

5 30 200 230 4 6 20 26

6 36 200 236 6 6 16.67 22.67

7 46 200 246 10 6.6 14.3 20.9

Which Per Unit Cost Curves Change? 69



0 0 200 200 - - - -

1 10 200 210 10 10 100 110

2 16 200 216 6 8 50 58

3 21 200 221 5 7 33.3 30.3

4 26 200 226 5 6.5 25 31.5

5 30 200 230 4 6 20 26

6 36 200 236 6 6 16.67 22.67

7 46 200 246 10 6.6 14.3 20.9

ONLY AFC and ATC Increase! 70



0 0 200 200 - - - -

1 10 200 210 10 10 200 110

2 16 200 216 6 8 100 58

3 21 200 221 5 7 66.6 30.3

4 26 200 226 5 6.5 50 31.5

5 30 200 230 4 6 40 26

6 36 200 236 6 6 33.3 22.67

7 46 200 246 10 6.6 28.6 20.9

ONLY AFC and ATC Increase! 71



0 0 200 200 - - - -

1 10 200 210 10 10 200 210

2 16 200 216 6 8 100 108

3 21 200 221 5 7 66.6 73.6

4 26 200 226 5 6.5 50 56.5

5 30 200 230 4 6 40 46

6 36 200 236 6 6 33.3 39.3

7 46 200 246 10 6.6 28.6 35.2

If fixed costs change ONLY AFC and ATC Change!

MC and AVC DON’T change! 72

Quantity

Co

sts

(d

ollars

)

AFC

AVC

ATC

MC

Shift from an increase in a Fixed Cost

ATC1

AFC1

73

Quantity

Co

sts

(d

ollars

)

MC

Shift from an increase in a Fixed Cost

ATC1

AVC

AFC1

74



0 0 100 100 - - - -

1 10 100 110 10 10 100 110

2 16 100 116 6 8 50 58

3 21 100 121 5 7 33.3 30.3

4 26 100 126 5 6.5 25 31.5

5 30 100 130 4 6 20 26

6 36 100 136 6 6 16.67 22.67

7 46 100 146 10 6.6 14.3 20.9

What if the cost for variable resources

increase

75


0 0 100 100 - - - -

1 10 100 110 10 10 100 110

2 16 100 116 6 8 50 58

3 21 100 121 5 7 33.3 30.3

4 26 100 126 5 6.5 25 31.5

5 30 100 130 4 6 20 26

6 36 100 136 6 6 16.67 22.67

7 46 100 146 10 6.6 14.3 20.9


76


0 0 100 100 - - - -

1 11 100 110 10 10 100 110

2 18 100 116 6 8 50 58

3 24 100 121 5 7 33.3 30.3

4 30 100 126 5 6.5 25 31.5

5 35 100 130 4 6 20 26

6 43 100 136 6 6 16.67 22.67

7 55 100 146 10 6.6 14.3 20.9


77


0 0 100 100 - - - -

1 11 100 111 10 10 100 110

2 18 100 118 6 8 50 58

3 24 100 124 5 7 33.3 30.3

4 30 100 130 3 6.5 25 31.5

5 35 100 135 4 6 20 26

6 43 100 143 6 6 16.67 22.67

7 55 100 155 10 6.6 14.3 20.9


Which Per Unit Cost Curves Change? 78


0 0 100 100 - - - -

1 11 100 111 11 10 100 110

2 18 100 118 7 8 50 58

3 24 100 124 6 7 33.3 30.3

4 30 100 130 6 6.5 25 31.5

5 35 100 135 5 6 20 26

6 43 100 143 8 6 16.67 22.67

7 55 100 155 12 6.6 14.3 20.9


MC, AVC, and ATC Change! 79


0 0 100 100 - - - -

1 11 100 111 11 11 100 110

2 18 100 118 7 9 50 58

3 24 100 124 6 8 33.3 30.3

4 30 100 130 6 7.5 25 31.5

5 35 100 135 5 7 20 26

6 43 100 143 8 7.16 16.67 22.67

7 55 100 155 12 7.8 14.3 20.9


MC, AVC, and ATC Change! 80


0 0 100 100 - - - -

1 11 100 111 11 11 100 111

2 18 100 118 7 9 50 59

3 24 100 124 6 8 33.3 41.3

4 30 100 130 6 7.5 25 32.5

5 35 100 135 5 7 20 27

6 43 100 143 8 7.16 16.67 23.83

7 55 100 155 12 7.8 14.3 22.1

Shifting Costs CurvesIf variable costs change MC, AVC, and ATC Change!

81

Quantity

Co

sts

(d

ollars

)

AFC

AVC

ATC

MC

ATC1

AVC1

Shift from an increase in a Variable CostsMC1

82

Quantity

Co

sts

(d

ollars

)

AFC

ATC1

AVC1

Shift from an increase in a Variable CostsMC1

83

4.

a. Labor is a variable cost so ATC and MC will increase. Same answer even if labor is both a variable and fixed cost.

b.

c. d. If a firm increases its

productivity, it will decrease its

production costs.

0

50

100

150

200

250

300

350

0 1 2 3 4 5 6 7

#1

TP 2

MP 2

MC2

ATC2

Costs of ProductionTotal Revenue - the amount a firm receives for the sale of its output.

Total Cost - the value of the inputs a firm uses in production.

Profit is the firm’s total revenue minus its total cost.

Profit = Total revenue - Total cost

Accountants look at only EXPLICIT COSTS

•Explicit costs (out of pocket costs) are payments paid

by firms for using the resources of others.

•Example: rent, wages, materials

Accounting profit = total revenue – explicit costs (and depreciation)

Economists examine both the EXPLICIT COSTS and the IMPLICIT COSTS

•Implicit costs are the opportunity costs that firms “pay” for using

their own resources

•Example: forgone wage, rent, time

Economic profit = total revenue – explicit costs and implicit costs

You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could be an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year.

ACCOUNTING PROFIT

$200,000 (total revenue) − $100,000 (cost of bikes) − $20,000 (electricity, taxes, and other expenses)

= $80,000

Accounting profit = total revenue – explicit costs (and depreciation)


OPPORTUNITY COST?

ECONOMIC PROFIT:

$200,000 (total revenue) − $100,000 (cost of bikes) − $20,000 (electricity, taxes, and other expenses) − $40,000 (opportunity cost of your time) − $50,000 (opportunity cost of not renting the store)

= - $10,000


So although you make an accounting profit each year, you would be better off renting the store to the large chain and being an accountant since your opportunity cost of continuing to run your own store is too high.

not renting the store for $50,000 and $40,000 salary

Economic Profits

Positive economic profit = TR > implicit + explicit � DO IT!

Negative economic profit = TR < implicit + explicit � SKIP IT!

Should a firm be worried if it is earning zero economic profits?

No, a firm earning zero (normal) economic profit has still earned enough revenue to cover explicit and implicit costs.

Since its not negative, it means the firm could not do any better using its resources in an alternative activity.

Economic profit is never higher than accounting profit since it includes

opportunity costs. Thus it is possible for a firm to earn positive accounting

profits and zero economic profit.


OPPORTUNITY COST?

ECONOMIC PROFIT:

$200,000 (total revenue) − $100,000 (cost of bikes) − $20,000 (electricity, taxes, and other expenses) − $30,000 (opportunity cost of your time) − $50,000 (opportunity cost of not renting the store)

= $0


You should own and operate the bike store since you have earned normal profits. Your accounting profit is $80,000 and that’s what you would now pay yourself for owning the bike store. In this scenario, you would not be better off being an accountant and renting out your store.

not renting the store for $50,000 and $30,000 salary

Economic Profits Positive economic profit = TR > implicit + explicit � DO IT!

A positive economic profit indicates the current use is the best use of resources.

Negative economic profit = TR < implicit + explicit � SKIP IT

A negative economic profit indicates there is a better alternative use of resources.

Economic profit is never higher than accounting profit since it accounts for opportunity costs. Thus it is possible for a firm to earn positive accounting profits and zero economic profit.

Should a firm be worried if it is earning zero economic profits?

No, a firm earning zero/normal economic profit has still earned enough revenue to cover his/her implicit and explicit costs.

Since its not negative, it means the firm could not do any better using its resources in an alternative activity.

From now on, we are only concerned with ECONOMIC

COSTS

Quantity

Co

sts

(d

ollars

)

AFC

AVC

ATC

121110987654321

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

TC of 11 units?

If each unit sells for $7, what is total

revenue? Economic profit?

MC

Should the producer exit

this industry?

No, the producer is earning

zero (normal) economic

profits, which means

he/she is earning positive

accounting profits.

Long-Run Production and

Costs

In the long run all resources are variable.

Plant capacity/size can change.

In the short run, a firm can only move along its current ATC curve

However, in the long run it can move from one ATC curve to another by varying the size of its plant

Firms will adjust their output in the LR. Each adjustment will

correspond with a new ATC.

95Quantity Cars

Costs

ATC1

MC1

0 1 100 1,000 100,000 1,000,0000

$9,900,000

$50,000

$6,000

$3,000

96Quantity Cars

Costs

ATC1

MC1

MC2

ATC2

$3,000

$6,000

$50,000

$9,900,000

0 1 100 1,000 100,000 1,000,0000

97Quantity Cars

Costs

ATC1

MC1

ATC2

MC2

ATC3

MC3

$3,000

$6,000

$50,000

$9,900,000

Economies of Scale • As output increases, FC is more spread out.

• Firms that produce more can better use mass

production techniques and specialization

causing ATC to fall.

�Firms have increasing returns to scale –

an increase in inputs leads to a greater

proportional increase in output.� Input increase by 10% and output

increases by 15%

0 1 100 1,000 100,000 1,000,0000

98Quantity Cars

Costs

ATC1

MC1

ATC2

MC2

ATC3

MC3

MC4

ATC4

Constant Returns to Scale • ATC reaches its minimum

� Increases in inputs are proportional

to increases to output.

0 1 100 1,000 100,000 1,000,0000

$3,000

$6,000

$9,900,000

$50,000

99Quantity Cars

Costs

ATC1

MC1

ATC2

MC2

ATC3

MC3

MC5

MC4 ATC5

ATC4

0 1 100 1,000 100,000 1,000,0000

$3,000

$6,000

$50,000

$9,900,000

100Quantity Cars

Costs

ATC1

MC1

ATC2

MC2

ATC3

MC3

MC5

MC4 ATC5

ATC4

• firm gets too big and becomes difficult

to manage causing ATC to rise

Diseconomies to Scale

�Firms have decreasing returns to scale -

output increases less than the

proportional increase in inputs.

0 1 100 1,000 100,000 1,000,0000

$3,000

$6,000

$50,000

$9,900,000

Long Run AVERAGETotal Cost

101Quantity Cars

Costs

ATC1

MC1

ATC2

MC2

ATC3

MC3

MC5

MC4 ATC5

ATC4

Long-run ATC curve is made up of different short-

run ATC curves of various plant sizes.

0 1 100 1,000 100,000 1,000,0000

$3,000

$6,000

$50,000

$9,900,000

Long Run AVERAGE Total Cost

102Quantity Cars

Costs

0 1 100 1,000 100,000 1,000,0000

Long Run Average Cost Curve

Increasing returns to scales

Decreasing returns to scale

Economies

of

scale

Constant

returns to

scale

Diseconomiesof

scale

• Economies of scale -long-run average total cost falls as the quantity of output increases.

• Diseconomies of scale -long-run average total cost rises as the quantity of output increases.

• Constant returns to scale - long-run average total cost stays the same as the quantity of output increases

Long Run AVERAGETotal Cost

103Quantity Cars

Costs

ATC1

MC1

ATC2

MC2

ATC3

MC3

MC5

0 1 100 1,000 100,000 1,000,0000

MC4 ATC5

ATC4

A firm will choose the ATC curve—among all of the

ATC curves available—that enables it to produce

at lowest possible average total cost

$6,000

$3,000

$50,000

$9,900,000

Documents

Marginal Product and Marginal Cost - 1.cdn.edl.io · PDF fileFigure 5 Thirsty Thelma’s Average-Cost and Marginal-Cost ... – Total Fixed Costs (TFC) – Total Variable Costs