amount of money you spend on labor will increase if you want to produce more

Amount of money you spend on labor will increase if

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amount of money you spend on labor will increase if you want to produce more) Total cost is equal to fixed cost plus variable cost Average and Marginal Cost Definition of average total cost (ATC): total cost divided by the quantity of output Definition of average fixed costs (AFC): total fixed costs divided by the quantity of output Definition of average variable cost (AVC): total variable costs divided by the quantity of output Definition of marginal cost: the increase in total cost that arises from an extra unit of production Average total cost tells us the cost of a typical unit of output and marginal cost tells us the cost of one more additional unit of output
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Cost Curves Rising marginal cost Ø This occurs because of diminishing marginal product Ø At a low level of output, there are few workers and a lot of idle equipment. But as output increases, the coffee shop (for example) gets crowded and the cost of producing another unit of output becomes high U-shaped average total cost Ø Average total cost is the sum of average fixed cost and average variable cost Ø Definition of efficient scale: the quantity of output that minimizes average total cost, AKA the minimum of the ATC curve Relationship between marginal cost and average total cost and average variable cost Ø The MC curve intersects the ATC curve at the minimum of the ATC curve Ø The MC curve also intersects the AVC curve at the minimum of the AVC curve
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Competitive Markets Definition of competitive market : a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker There are three characteristics of a competitive market (sometimes called a perfectly competitive market): Ø There are many buyers and sellers Ø The goods offered by the sellers are largely the same Ø Firms can freely enter or exit the market Total Revenue = Price x Quantity Average Revenue = Total Revenue ÷ Quantity Ø Average revenue is always equal to the price Marginal Revenue = Change in Total Revenue ÷ Change in Quantity Marginal revenue is equal to the price only for firms that operate in perfectly competitive markets
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Profit Maximization Q Total Revenue Total Cost Profit Marginal Revenue Marginal Cost Change in Profit 0 $0 $3 $-3 ---- ---- ---- 1 6 5 1 $6 $2 $4 2 12 8 4 6 3 3 3 18 12 6 6 4 2 4 24 17 7 6 5 1 5 30 23 7 6 6 0 6 36 30 6 6 7 -1 7 42 38 4 6 8 -2 8 48 47 1 6 9 -3 In this example, profit is maximized if the farm produces four or five gallons of milk (see the fourth column) The profit-maximizing quantity can also be found by comparing marginal revenue and marginal cost As long as marginal revenue exceeds marginal cost, increasing output will raise profit If marginal revenue is less than marginal cost, the firm can increase profit by decreasing output (AKA by producing less) The profit-maximizing quantity occurs where marginal revenue is equal to marginal cost Ø In this example, this occurs at Q = 6
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