Ch. 8 Sec. 2 - chapter 8 Behind the Supply Curve: > Inputs...

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>> Behind the Supply Curve: Inputs and Costs Section 2: Two Key Concepts: Marginal Cost and Average Cost chapter 8 We’ve just seen how to derive a firm’s total cost curve from its production function. Our next step is to take a deeper look at total cost by deriving two extremely useful measures: marginal cost and average cost . As we’ll see, these two measures of the cost of production have a somewhat surprising relationship to each other. Moreover, they will prove to be vitally important in Chapter 9, where we will use them to analyze the firm’s output decision and the market supply curve. Marginal Cost We defined marginal cost in Chapter 7: it is the change in total cost generated by pro- ducing one more unit of output. We’ve already seen that marginal product is easiest to calculate if data on output are available in increments of one unit of input. Similarly, marginal cost is easiest to calculate if data on total cost are available in incre- ments of one unit of output. When the data come in less convenient increments, it’s still possible to calculate marginal cost over each interval. But for the sake of simplic- ity, let’s work with an example in which the data come in convenient increments.
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Ben’s Boots produces leather footwear; Table 8-1 shows how its costs per day depend on the number of boots it produces per day. The firm has fixed cost of $108 per day, shown in the second column, which represents the daily cost of its boot- making machine. The third column shows the variable cost, and the fourth column shows the total cost. Panel (a) of Figure 8-5 plots the total cost curve. Like the total cost curve for George and Martha’s farm in Figure 8-4 in “Section 1: The Production Function,” this curve is upward sloping, getting steeper as you move up it to the right. The significance of the slope of the total cost curve is shown by the fifth column of Table 8-1, which calculates marginal cost : the cost of each additional unit. The gen- eral formula for marginal cost is (8-3) Marginal cost == or MC =∆ TC/ Q As in the case of marginal product, marginal cost is equal to “rise” (the increase in total cost) divided by “run” (the increase in the quantity of output). So just as mar- ginal product is equal to the slope of the total product curve, marginal cost is equal to the slope of the total cost curve. Now we can understand why the total cost curve gets steeper as we move up it to the right: as you can see in Table 8-1, the marginal cost at Ben’s Boots rises as output increases. Panel (b) of Figure 8-5 shows the marginal cost curve corresponding to the data in Table 8-1. Notice that, as in Figure 8-2 in “Section 1: The Production Function,” we plot the marginal cost for increasing output from 0 to 1 pair of boots halfway between 0 and 1, the marginal cost for increasing output from 1 to 2 pairs of boots halfway between 1 and 2, and so on.
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This note was uploaded on 04/13/2010 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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Ch. 8 Sec. 2 - chapter 8 Behind the Supply Curve: > Inputs...

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