Do you know what “marginal cost” is?

Introduction Do you know what “marginal cost” is? The first column of the table shows how many cups of lemonade Thelma can make, from zero to 10 cups per hour. The second column represents the total cost of lemonade produced in Telma.

Do you know what “marginal cost” is?

The first column of the table shows the number of cups of lemonade Thelma can make, from zero to 10 cups per hour. The second column represents the total cost of producing the lemonade for Thelma. Figure 13-4 shows Thelma's total cost curve. The quantity of lemonade (according to the first column) is on the horizontal axis, while the total cost (according to the second column) is on the vertical axis. The shape of Sosti Telma's total cost curve is similar to that of Hungry Helen. In particular, it becomes steeper as production increases, reflecting (as we discussed) a decrease in marginal product.

Fixed costs and variable costs

Thelma's total costs can be divided into two categories. Some costs do not change with changes in production volume and are called fixed costs. Thelma's fixed costs include the rent she pays, because this cost is the same regardless of her location.it the quantity of lemonade produced by Thelma. Similarly, if Thelma must hire a full-time paid clerk, that clerk's salary is a fixed cost, regardless of the quantity of lemonade produced. The third column of Table 13-2 shows Thelma's fixed costs, which in this example are $3 per hour.

Some of a company's costs that change as the company changes its output are called variable costs. Thelma's variable costs include the cost of lemons and sugar: the more lemonade Thelma makes, the more lemons and sugar she must purchase. Similarly, if Thelma has to hire more workers to produce more lemonade, then the wages of those workers are variable costs. The fourth column of the table represents Thelma's variable costs. If it does not produce, the variable cost is zero, if it produces a cup of lemonade, the variable cost is $0.30, if it produces 2 cups of lemonade,the variable cost is $0.80, and so on.

Marginal Cost Questions

The relationship between marginal cost and average cost is that when average cost and marginal cost are equal, average cost is lowest. This important property is manifested in the fact that the marginal cost line intersects the average cost line at the lowest point of the average cost line.

Marginal cost, sometimes called incremental cost, is the increase in cost caused by producing one additional unit of output. Since fixed costs do not change with changes in the firm's level of output, the increase in variable costs caused by each additional unit of output constitutes marginal cost.

What is the formula for calculating marginal cost?

The formula for calculating marginal cost is MC(Q)=△TC(Q)/△Q. Among them, marginal cost is equal to the change in total cost (TC) (△TC) dividede by the corresponding variation in production (△Q). Marginal cost indicates how much total cost increases when output increases by 1 unit. Generally speaking, as production increases, total cost decreases and marginal cost decreases, which is the scale effect.

What is the average cost?

Average cost refers to the average level of cost consumption within a certain range and over a certain period. The average cost always concerns a given product or service. Changes in the average cost of producing a product or providing services over a certain period often reflect the overall level of cost management within a certain range.flat changes.

Average cost is divided into industry average cost and company average cost. Industry average cost, also called social average cost, is the average cost calculated by the weighted average method for all companies producing ant the same product in an industry. The average cost of the company is the quotient obtained by dividing the total cost of the company by the total production of the company.

What is marginal cost pricing?

Marginal cost pricing method is a pricing method based on the marginal cost of a unit product and is a cost-oriented pricing method. In a perfectly competitive market, the marginal cost pricing method is a pricing method that achieves market equilibrium. At that point, the firm's marginal revenue equals marginal cost and short-run profit is zero. Since marginal cost is the lowest price at which a good can be sold without considering sunk costs, the business can continue to survive in the short term.

The relationship between the marginal cost curve and the average cost curve

Because marginal cost reflects the increasetation of the cost of each additional unit of product. Therefore, if marginal cost decreases as output increases, it is obvious that the corresponding average cost and average variable cost will also decrease. If marginal cost increases, this means that the cost of each additional unit of output increases. This can be divided into two situations: when the marginal cost is less than the average cost, that is, when MCSAC, the average cost SAC. increases with the increase in production Q. And increases when the marginal cost is equal to the average cost, that is to say: when MC=SAC, the average cost SAC reaches the minimum value.

The average variable cost AVC is similar to SAC. From AVC

The above analysis shows that at S, point on the STC curve, the slope of the line drawn from the origin 0 is equal to the slope of the tangent line therefore , when. the output level is O0, SAC not only at the lowest point sj, and SAC=SMC, that is, the SMC curve intersects the SAC curve at the lowest point s of the SAC curve: before the point S3 on the STC curve, the slope of the drawn line is greater than the slope of the tangent line, therefore at the output level below 0Q, SAC>SMC, that is to say that the SAC curve is above the SMC curve after the point S of the STC curve; the slope of the drawn ray is less than the slope of the tangent line, so when the output level is greater than OQ, SAC

Similarly, since the STC curve and the DVC curve each have the same slope output, MC can also be expressed by the slope of TVC. It can also be seen in Figure 4-6 that when the 0S ray from the origin to TVC passes through TVC, AVC is minimum. When AVC is minimum, the slope of the tangent OS: also represents the marginal cost at this point. Therefore, when the average variable cost is minimum, the marginal cost is equal to the average variable cost. This shows that the MC curve andthe AVC curve also intersect at the lowest point of the AVC curve. Section 3 Long-term cost analysis

In reality, the life cycle of an enterprise is generally very long, so the production process of an enterprise is generally a long-term continuous process . In the long run, a company can adjust its total input of all production factors, so there is no distinction between fixed costs and variable costs, all costs are variable costs. In this way, the company has a long-run cost function.

The so-called long-run cost function refers to the dependence between cost and production when the inputs of all production factors can be changed when the technical conditions of production remain unchanged. Long-run cost can also be divided into long-run total cost, long-run average cost and long-run marginal cost, which we will analyze separatelybelow.

1. Long-term total cost

Long-term total cost (expressed in LTC) refers to the long term, all input factors are variable, so the company can adjust the production scale to achieve The lowest total cost required to produce a certain quantity of product. The long-run total cost function reflects the dependence between different output levels and the lowest total cost, which is somewhat different from the short-run total cost function.

First, the fixed cost in the short-run total cost function is not a function of output, while the long-run total cost is the long-run total variable cost, which is a function from production.

Second, when output is zero, the short-run total cost STC=TFC=C and the long-run total cost LTC=0, that is, the cost curve at long term passes through the origin. .

Third, the coLong-run total cost curve refers to the trajectory of the lowest total cost point required by a company to adjust its scale of production and produce various long-term outcomes.

This means that in the long run, firms can adjust the input of all factors of production as needed to achieve the optimal combination of factors of production, i.e. long-run total cost corresponding to any level of production is optimal The lowest cost with an optimal production mix. The short-run total cost curve refers to the trajectory of a firm's minimum cost at different production levels and a certain production scale. This means that firms cannot adjust the input of fixed factors in the short term to achieve the optimal combination of production factors, and there is often a surplus or shortage of fixed factors such as machinery and equipment.ipements. Therefore, for short-run production with given fixed factor inputs, only at the optimal production level, the short-run total cost is equal to the long-run total cost, and at other production levels, the cost The short-term total is always greater than the long-term total cost.

(1) Long-run total cost curve and short-run total cost curve

The short-run total cost curve represents a specific scale of production, it is i.e. the quantity of input of one or some input factors The relationship between cost and output under constant conditions; The long-run total cost curve represents the relationship between cost and output provided that the input quantities of all input factors are optimal. Therefore, only at the optimal production level, the short-run cost is equal to the long-run cost, and the long-run cost is composed of several of these costs.short-term costs. In Figure 4-7, STC. STC:STC3 respectively represent fixed costs in the form C, C:C. The short-run total cost curve also constitutes the three scales that companies can choose from. Before point B, STC. If the cost is the lowest, companies will choose STC. represents the scale of production; similarly between B and C, STC will be selected: represents the production scale, after C, STC will be selected, representing production scale. The correspondingly connected irregular ABCD curve is the firm's long-run total cost curve.

(2) Long-run total cost curve and production expansion curve

The long-run total cost curve is extremely closely related to the expansion line optimal production discussed in the production function. analysis. The long-run total cost curve is the trajectory of the lowest total cost required by the company to adjust its efficiency.helle of long-term production in order to produce various results. The optimal expansion line represents the trajectory of the firm's optimal combination of production factors under various production cost constraints. If, at different levels of production, the firm produces at the optimal production scale, that is, with the optimal combination of production factors, then the total cost paid by the firm is the total cost at long term. Indeed, any point on the optimal expansion line represents an optimal combination of production factors, and the total cost represented by this combination of factors is the lowest total cost for a given product. The relationship between the optimal expansion line and the long-run total cost curve is shown in Figure 4-8.

In Figure 4-8, each point E on the expansion line, E: E, corresponds respectively to yield and cost: E. (Q. C.), E: (Q: C:) , E. (C.R.).Adjust the output level Q, Q:Q. and their corresponding production costs C. C: C is represented with points Ej, E,2 and Ej in Figure 4-8(b), and a smooth curve is used to connect Ej, E,2 and Ej in order to 'obtain the corresponding long-run total cost curve. LTC. It represents the trajectory of the lowest total cost at different levels of production when all the factors of production of the firm are variable in the long run and the scale of production can be adjusted.

The cost is lower, therefore point a is a point on the long-run average cost curve. By repeating this process for different production quantities, the long-run average cost can be determined. Yield of. To Q: So the factory is the most efficient, SAC. This part is part of the long-run cost function. Output from Q: to Q. Plant 2 is the most efficient, with output starting at Q. to Q. Plant 3 is the most efficient. When the echit optional is limited, an irregular LAC curve similar to ABCDE in Figure 4-9 is obtained. This curve is called the outer envelope. Ultimately, companies still plan to produce on this external line. For example, the company currently operates at the scale of plant 2, with output Q and unit cost c:. If output is still Q, the firm will consider adjusting the factory size to scale 1, so that unit cost can be reduced to C,

Most firms have the choice between several scales of production, and each scale has a corresponding short-run average cost curve. When the production scale can be subdivided infinitely, a smooth LAC curve is obtained as shown in Figure 4-10. The LAC curve at this time is an envelope formed by connecting the lowest cost points of many SAC curves. There are countless U-shaped lines tangent to the SAC curve.

It should be emphasized that the long-run average cost curve is not composed of the lowest points of many short-run average cost curves. As shown in Figure 4-10, the short-run average cost curve and the long-run average cost curve are tangent when output changes. When Q is increased to 7, the long-run average value of this curvature h is reduced to Yin. Keep the stick in the middle of level E. All period average cost curves are tangent to the long run average cost curve at a point to the left of their lowest point. Only when output is Q 7 does the short-run average cost curve SAC:. The lowest point of is tangent to the lowest point of the long-run cost curve LAC. Once output exceeds Q 7, as output increases, long-run average cost increases. At this point, all short-run average cost curves are tangent to thelong-run average cost curve at a point to the right of their lowest point.

The reason the long-run average cost curve is U-shaped is determined by the law of increasing-constant-decreasing returns to scale. In the stage of increasing returns to scale, the average cost shows a downward trend and production achieves economies of scale. At the constant returns to scale stage, the average cost curve is horizontal and the firm generally reaches its optimal scale. In the stage of decreasing returns to scale, average costs show an increasing trend and production exhibits diseconomies of scale.

3. Long-run marginal cost

Long-run marginal cost (expressed in LMC) refers to the increased total cost of each additional unit of output in the long run.

If the long-run total cost function is a continuous function, then the long-run marginal cost term is the slope of the long-run total cost function.

What differs from short-run marginal cost is that before and after any unit increase in output, the input factors always maintain the optimal combination, i.e. that when production increases, total cost increases the least, and when production decreases, total cost is reduced the most.

The long-run marginal cost curve is not formed by the envelope of the short-run marginal cost curve. The long-run marginal cost curve always crosses the short-run marginal cost curve, and the intersection. The point must lie on the long-run average cost curve. The vertical line where the point of tangency between LAC and the short-run average cost curve is located. We can use the relationship between the LA C curve and the SAC curve and the relationship between the SAC curve and the SMC curve to draw the LMC curve, as shownFigure 4-11.

In Figure 4-11, SAC;, SAC2, and SAC3 are three short-run average cost curves of different production scales. SMC. SMC: and SMC are respectively the short-term marginal cost curve corresponding to the aforementioned short-term average cost curve. The SAC curve is tangent to the LAC curve at point A. The output corresponding to point A is Q. At the level of Q, SMC. A 7 on the curve is the point on the LMC curve; the curve is tangent to the LAC curve at the lowest point 8 of the 1AC curve, and the output level is Q at this time, SMC: point B 7; on the curve is LMC The point on the SAC curve, the curve is tangent to the LAC curve at point C, and the output level corresponding to point C is Q. At this time, SMC. Point C7 of the curve is also a point of the LMC curve. Use a smooth curve to connect points A 7, B 7 and C 7 to obtain the LMC curve.

We can see that the long marginal cost curve term is composed of countless short-run marginal cost curves and is also a U-shaped curve that first goes down and then goes up. The LMC curve reaches its lowest point before the LAC curve reaches its lowest point, and must intersect at the lowest point of the 1AC curve as it rises. Before the intersection, the LAC curve is decreasing, but LAC>LMC; at the time of intersection, the LAC curve is at the lowest point, and LAC=LMC after the intersection, the LAC curve is rising, but LAC

About A and A 7 are both at the output Q, and it can be proved as follows:

Because SAC and LAC are tangent to the point A with the output Q, so when the output is 0:

< p>As for the relationship between long-run total cost, long-run average cost and long-run marginal cost, it is similar to the relationship between total cost at short term and short term average cost. and the short-term marginal cost mentioned aboveut and will not be repeated here.

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