Notes Lecture Jan 27 The firms total cost is the sum of its fixed and variable costs: o Total cost= fixed Cost + variable cost The firms marginal cost is the change in total cost divided by the corresponding change in output. o MC = Change TC/Change Q o MC = Change VC/Change Q How many to hire and how many to bats to produce o Depends on how much he can sell them for, he has to be a price-taker, looking at the prevailing market prices Choosing Output to Maximize Profit o If a companys goal is to maximize its profit, it should continue to expand its output as long as the marginal benefit is at least as great as the marginal cost. o Example: Suppose the wholesale price of each bat (net of lumber of other materials costs is) $2.50 How many bats should Louisville Slugger produce. When MB = MC o To confirm that the cost- benefit principle thus applied identifies the profit-maximizing number of bottles to produce, we can calculate profit level directly. o When the law of diminishing returns applies (that is, when some factors of production are fixed), marginal cost goes up as the firm expands production beyond some point. Under these circumstances, the firms best option is to keep expanding as output long as marginal cost is less than price o The profit maximizing output level for the perfectly competitive firm: P = MC Use a graphical approach, graph the points on your typical table for Marginal Cost, Average Variable Curve, Average Total Cost The upwards sloping portion of the marginal cost curve corresponds to the region of diminishing returns The marginal cost curve must intersect both the average variable cost curve (AVC) and the average total cost curve (ATC) at their respective minimum points, when the marginal is less than average is it bringing down the average, same for converse In earlier examples, we implicitly assumed that the firm could employ workers only in whole number amounts. Under these conditions, we saw that the profit-maximizing output level for the Louisville Slugger was one for which marginal cost was somewhat less than price (because adding yet another employee would have pushed marginal cost higher than price). But when output and employment can be varied
continuously the maximum-profit condition is that price be equal to marginal cost. Price line is constant and does not change Wherever MC and price intersect, that rectangle = Profit