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Econ112_TAM_concepts_020808

Econ112_TAM_concepts_020808 - Handout Total Average and...

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Handout: Total, Average, and Marginal Concepts in Economics Much of economics involves relationships between variables. How are car sales affected by prices, income, or time of the year? Does a university's tuition affect its applications for admission? And so on. Many of these relationships, especially in microeconomics, involve total , average , and marginal concepts. Once you know how these concepts differ , and how they relate to one another, you will have mastered a critical element of microeconomics. The advantage? Many specific examples of total, average, or marginal concepts are simply special cases of the more general principles. This handout describes the three concepts, the relationships between them, and a few other useful bits of information. Total Let T be some variable that depends on another variable x. We'll write this relationship as a function , T(x). Economic examples include utility functions (total utility as a function of the quantity consumed), total cost functions (total cost as a function of output), or production functions (output as a function of some input like labor). For now, we'll just stick with T(x) . If we graph T(x), it might be flat, steadily increasing, steadily decreasing, U-shaped, or hill-shaped, depending on the particular relationship. Suppose we have a simple linear relationship with a positive slope , as shown in Figure 1. This might represent, for example, a
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