For now though to illustrate what marginal cost is

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Unformatted text preview: Cost Concept Marginal cost is an important cost concept in economics. As you will see later, it is one of the two factors a business must know about when deciding how much of a good it is best to produce. For now, though, to illustrate what marginal cost is, suppose Torres currently produces 1,000 units of a toy, and total cost is $6,000. She then decides to produce an additional unit of the toy; in other words, she produces one more toy. As a result, total cost rises from $6,000 to $6,008. What is the change in total cost that results from this change in output? Well, if total cost was $6,000 and then it rose to $6,008, the change in total cost (from $6,000 to $6,008) must be $8. In other words, total cost has changed by (increased by) $8. This change in total cost that results from producing an additional unit of output is called marginal cost. (Every time you read the word marginal in economics you should think “additional.”) In other words, marginal cost is the additional cost of producing an additional unit of a good. In our example, the marginal cost is $8. When you think about marginal cost, focus on the word change. Marginal cost describes a change in one thing (total cost) caused by a change in something else (quantity of output). In economics, the triangle symbol (∆) means “change in.” Thus, when we write Marginal cost (MC) ∆TC ∆Q we mean “marginal cost equals the change in total cost divided by the change in quantity of output.” We can place the numbers from our example in this equation. ∆TC, the change in total cost, is $8 ($6,008 $6,000 $8). ∆Q, the change in quantity produced, is 1 (1,001 1,000 1): Marginal cost (MC) Do you think these workers at a pineapple cannery most likely represent fixed or variable costs? $8 1 $8 The marginal cost is $8. Exhibit 7-5 reviews the five cost concepts discussed in this section. average total cost The total cost divided by the quantity of output. marginal cost The cost of producing an additional unit of a good; the change in total cost that results from producing an additional unit of output. Section 2 Costs 173 07 (154-185) EMC Chap 07 5/8/06 ? 4:54 PM Why Is It So Easy to Put On Weight? S ome people want to lose weight for health reasons, but they often find this hard to do. Why? Part of the answer has to do with the marginal cost of eating that additional hamburger, or slice of pie, or ice cream cone. Suppose Larry weighs 200 pounds, and he wants to get down to a weight of 185 pounds for health reasons. When eating, Larry makes incremental (one in a series of many) decisions as opposed to all-or-nothing decisions. An all-ornothing decision would be deciding whether to eat or not. This decision isn’t the one Larry has to make. He knows he is going to eat. The decision he must make is how much to eat, which is an incremental decision. Does he eat two strips of bacon or just one? Does he have a big piece of cake or a small piece of cake? Does he have three sodas a day or only two? Suppose...
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This document was uploaded on 01/16/2014.

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