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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
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.
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
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?
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- Winter '14