GESB
Lecture 11s.pdf

Increase in total cost arising from an extra unit of

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Increase in total cost arising from an extra unit of production Marginal cost = Change in total cost / Change in quantity MC = ΔTC / ΔQ Increase in total cost resulting from producing an additional unit of output

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GESB 1006: Economics of Everyday Life University of Macau Example 1: Total Cost and Marginal Cost \$10.00 \$5.00 \$3.33 \$2.50 \$2.00 Marginal Cost ( MC ) \$11,000 \$9,000 \$7,000 \$5,000 \$3,000 \$1,000 Total Cost 3000 2800 2400 1800 1000 0 Q (bushels of wheat) Q = 1000 ∆TC = \$2000 Q = 800 ∆TC = \$2000 Q = 600 ∆TC = \$2000 Q = 400 ∆TC = \$2000 Q = 200 ∆TC = \$2000
GESB 1006: Economics of Everyday Life University of Macau Example 1: The Marginal Cost Curve \$11,000 \$9,000 \$7,000 \$5,000 \$3,000 \$1,000 TC \$10.00 \$5.00 \$3.33 \$2.50 \$2.00 MC 3000 2800 2400 1800 1000 0 Q (bushels of wheat) \$0 \$2 \$4 \$6 \$8 \$10 \$12 0 1,000 2,000 3,000 Q Marginal Cost (\$)

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GESB 1006: Economics of Everyday Life University of Macau Why Marginal Cost Is Important? Farmer Jack is rational and wants to maximize his profit To increase profit, should he produce more or less wheat? Farmer Jack needs to “think at the margin” If the cost of additional wheat (MC) is less than the revenue he would get from selling it, then Jack’s profits rise if he produces more.
GESB 1006: Economics of Everyday Life University of Macau Fixed Cost and Variable Cost Fixed Costs (FC): Costs do not vary with the quantity of output produced For Farmer Jack, FC = \$1000 for his land Other examples: cost of equipment, loan payments, rent Variable Costs (VC): Costs vary with the quantity of output produced For Farmer Jack, VC = wages he pays workers Other example: cost of materials Total Cost: Fixed cost + Variable cost

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GESB 1006: Economics of Everyday Life University of Macau Example 2: Production Costs This example can be applied to almost any type of firm producing any good with any types of inputs. Calculate and graph TC knowing FC and VC Calculate and graph marginal and average costs Understand the relationship between marginal cost and average cost
GESB 1006: Economics of Everyday Life University of Macau Example 2: TC = FC + VC 7 6 5 4 3 2 1 620 480 380 310 260 220 170 \$100 520 380 280 210 160 120 70 \$0 100 100 100 100 100 100 100 \$100 0 TC VC FC Q \$0 \$100 \$200 \$300 \$400 \$500 \$600 \$700 \$800 0 1 2 3 4 5 6 7 Q Costs FC VC TC

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GESB 1006: Economics of Everyday Life University of Macau Example 2: Marginal Cost \$0 \$25 \$50 \$75 \$100 \$125 \$150 \$175 \$200 0 1 2 3 4 5 6 7 Q Costs 620 7 480 6 380 5 310 4 260 3 220 2 170 1 \$100 0 MC TC Q 140 100 70 50 40 50 \$70 TC Q MC =
GESB 1006: Economics of Everyday Life University of Macau Example 2: Average Fixed Cost (AFC) 100 7 100 6 100 5 100 4 100 3 100 2 100 1 14.29 16.67 20 25 33.33 50 \$100 n/a \$100 0 AFC FC Q \$0 \$25 \$50 \$75 \$100 \$125 \$150 \$175 \$200 0 1 2 3 4 5 6 7 Costs Q

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GESB 1006: Economics of Everyday Life University of Macau Example 2: Average Variable Cost (AVC) 520 7 380 6 280 5 210 4 160 3 120 2 70 1 74.29 63.33 56.00 52.50 53.33 60 \$70 n/a \$0 0 AVC VC Q AVC ) is variable cost divided by the quantity of output: Q may fall initially. will eventually rise as output rises. \$0 \$25 \$50 \$75 \$100 \$125 \$150 \$175 \$200 0 1 2 3 4 5 6 7 Costs Q
GESB 1006: Economics of Everyday Life University of Macau Example 2: Average Total Cost (ATC) Average total cost (ATC) equals total cost divided by the quantity of output: ATC = TC/Q Also, ATC = AFC + AVC 88.57 80 76 77.50 86.67 110 \$170 n/a ATC 620 7 480 6 380 5 310 4 260 3 220 2 170 1 \$100 0 74.29 14.29 63.33 16.67 56.00 20 52.50 25 53.33 33.33 60 50 \$70 \$100 n/a n/a AVC AFC TC Q

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• Fall '18
• University of Macau, Economics of Everyday Life

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