- The difference between total revenue and total cost.
|Marginal cost (MC)
- The increase in total costs associated with a one unit
increase in production.
change in total cost
MC = ----------------------
change in output
- Whenever MPP is increasing, the marginal cost of producing
a good must be falling.
- If MPP declines, marginal cost increases.
- Marginal cost refers to the change in total costs
associated with one more unit of output.
- Diminishing returns in production cause marginal costs to
increase as the rate of output is expanded.
- Total Cost - The market value of
all the resources used to produce a good or service.
- Fixed Costs: Costs of production that
do not change when the rate of output is altered.
- Variable Costs: Costs of production
that change when the rate of output is altered.
Note 1: As the rate of output increases, AFC
decreases as the fixed cost is spread over more output.
average total costs (ATC) = -------------- =
AFC + AVC
total fixed costs
average fixed costs (AFC) = -------------------
total variable costs
average variable costs (AVC) = ----------------------
Note 2: As the rate of output increases, AVC
will eventually rise. AVC rises because of diminishing returns in
Note 3: The initial dominance of falling
combined with the later resurgence of rising AVC, is what gives the ATC
its characteristic U shape.
Note 4: The bottom of the “U” is important
it represents the minimum average total costs. It represents the
possible opportunity costs to produce the product. However, the
of producers is to maximize profit and that might not happen at this
|Economic vs. Accounting
- Accounting Costs: all of the costs that have an explicit
dollar cost attached to them.
- Economic Cost: the value of all
resources used to produce a good or service; opportunity cost.
- economic cost = explicit costs + implicit costs
- Long-Run: a period of time long enough for all
inputs to be varied (i.e., no fixed costs).
- Long-Run Average Costs: the long-run
curve is just a summary of our best short-run cost possibilities, using
technology and facilities.
- Long-Run Marginal Costs: the long-run
marginal costs curve intersects our long-run cost curve at its lowest
|Economies of Scale
- Economies of Scale: reductions in
minimum average costs that come about through increases in the size
(scale) of plant and equipment.
- Constant Returns to Scale: increases in
plant size do not affect minimum average costs: minimum per-unit costs
identical for small plants and large plants.
- Diseconomies of Scale
- Although large plants may be able to achieve greater
than smaller plants, there’s no assurance that they actually will.
- Diseconomies of Scale occur when an increase in plant
size results in reducing operating efficiency.
- Efficiency and size do not necessarily go hand in hand.
unit labor cost = -----------
- Low wages are not a reliable measure of global
- A worker’s productivity (MPP) depends on the quantity and
quality of other resources in the production process.
- Unit labor cost is a true measure of global
- In order for America to stay competitive in global markets,
American productivity must increase as fast as other nations.