Download Marginal cost

Economics
Chapter 5
Supply
Chapter 5
Section 2
Costs of Production
Economists divide a
producer’s costs into fixed
costs and variable costs.
A fixed cost is a cost that
does not change, no matter
how much is produced.
Examples of fixed costs might
include rent and machinery repairs.
A variable cost is a cost
that rises or falls depending
on the quantity produced.
These include the costs of
raw materials and some
labor.
Fixed costs and variable
costs are added together to
find total cost.
A Firm’s Labor
Decisions
• Business owners have to consider
how the number of workers they hire
will affect their total production.
• The marginal product of labor is the
change in output from hiring one
additional unit of labor, or worker.
Marginal Returns
• There are 3 types of marginal
returns
The First Type
Adding each worker will result in
increasing marginal returns.
Increasing marginal returns
occur when marginal
production levels increase with
new investment.
Workers will be able to specialize
and gain skills.
The Second Type
At some point, adding each
worker will result in diminishing
marginal returns.
Diminishing marginal returns
occur when marginal
production levels decrease
with new investment.
Workers may need to wait to use
a tools or machine.
As more workers are added,
there will eventually be negative
marginal returns.
The Third Type
Marginal cost is the cost of
producing one more unit of a
good.
Marginal revenue is the revenue
gained from producing one
more unit of a good – usually,
the price of a unit.
When marginal cost is less than
marginal revenue, a producer
has an incentive to increase
output, since it will earn a profit
on the next unit produced.
When marginal cost is more than
marginal revenue, a producer
has an incentive to decrease
output, since it will lose money
on the next unit produced.
Negative marginal returns occur
when the marginal product of
labor becomes negative.
Increasing, Diminishing, and Negative
Marginal Returns
8
7
6
Increasing
marginal
returns
Diminishing
marginal
returns
Marginal Product of labor
(beanbags per hour)
5
4
3
2
1
Negative
marginal
returns
0
–1
–2
1
2
3
4
5
6
7
8
–3
Labor
(number of workers)
9
Marginal cost is the cost of
producing one more unit of a
good.
Marginal revenue is the
revenue gained from producing
one more unit of a good –
usually, the price of a unit.
When marginal cost is less than
marginal revenue, a producer
has an incentive to increase
output, since it will earn a profit
on the next unit produced.
When marginal cost is more
than marginal revenue, a
producer has an incentive to
decrease output, since it will
lose money on the next unit
produced.
That is why profits are
maximized when marginal cost
equals marginal revenue.
Negative marginal returns occur
when the marginal product of
labor becomes negative.
The graphic below illustrates
how the marginal product of
labor is derived.
A Summary of
Production Costs
• A fixed cost is a cost that
does not change,
regardless of how much of a
good is produced.
Examples: rent and salaries
• Variable costs are costs that
rise or fall depending on
how much is produced.
Examples: costs of raw
materials, some labor costs.
• The total cost equals fixed
costs plus variable costs.
• The marginal cost is the
cost of producing one more
unit of a good.
Setting Output
• Marginal revenue is the
additional income from selling
one more unit of a good. It is
usually equal to price.
• To determine the best level of
output, firms determine the
output level at which marginal
revenue is equal to marginal
cost.