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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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View Full DocumentBen’s Boots produces leather footwear; Table 81 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 85 plots the total cost curve. Like the total
cost curve for George and Martha’s farm in Figure 84 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 81, which calculates
marginal cost
: the cost of each additional unit. The gen
eral formula for marginal cost is
(83)
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 81, the marginal cost at Ben’s Boots rises as output
increases. Panel (b) of Figure 85 shows the
marginal cost curve
corresponding to the
data in Table 81. Notice that, as in Figure 82 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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 Fall '06
 WISSINK
 Economics, Average cost, Cost curve

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