Questions and Answers
What does Marginal Cost (MC) give?
Marginal cost is related to average fixed cost.
False
What is the change in total cost associated with producing an additional unit known as?
Marginal Cost
What happens to average variable cost (AVC) as long as MC is less than AVC?
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The Marginal Cost (MC) falls when marginal product (MP) is _____?
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The Marginal Cost (MC) rises when marginal product begins to _____?
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What does the law of diminishing returns dictate?
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What is the result of dividing wage by marginal product?
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A profit-maximizing firm will stop hiring workers before exhausting the benefits of division of labor.
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The MC curve is increasing when it intersects with which curves?
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Study Notes
Marginal Cost (MC)
- Represents the change in total cost when producing one additional unit of output.
- Not influenced by average fixed cost as total fixed cost remains constant in the short run.
- Directly relates to average variable cost (AVC) and average total cost (ATC).
Change in Total Cost
- Equates to the change in total variable cost since total fixed cost remains unchanged regardless of output levels.
Relationship with Average Costs
- When marginal cost is below average, it pulls the average lower.
- If marginal cost remains below AVC, average variable cost declines.
- If marginal cost stays below ATC, average total cost declines.
Intersections and Minimum Points
- MC intersects AVC at its minimum point.
- MC intersects ATC at its minimum point.
- The MC curve rises after intersecting both AVC and ATC.
Effects of Marginal Cost on Averages
- When MC exceeds AVC, the average variable cost starts to increase.
- When MC surpasses ATC, average total cost begins to rise.
Characteristics of Cost Curves
- The MC curve passes through minimum points for both average total cost and average variable cost curves.
- Average total cost and average variable cost curves converge at higher output levels, indicating a decline in average fixed cost.
Determinants of Cost Curves
- The exact placement of cost curves depends on short-run production data and input prices unique to each firm.
Output Increase Mechanism
- Firms increase output by adding variable inputs.
Marginal Product (MP) and Marginal Cost (MC)
- Marginal cost decreases when marginal product is rising.
- Marginal cost increases when marginal product begins to decline, following the law of diminishing returns.
Law of Diminishing Returns
- Suggests that as more units of variable input are added to fixed inputs, the marginal product will eventually fall, leading to rising marginal costs.
Wage and Labor
- Wage paid to workers reflects the change in total cost related to one additional unit of labor.
Relationship Between MP and MC
- Dividing wage by marginal product demonstrates the inverse relationship between marginal product and marginal cost.
Employment Decisions in Profit-Maximizing Firms
- Profit-maximizing firms will fully utilize division of labor benefits and not stop hiring before optimal productivity is reached.
- These firms avoid selecting output levels that fall within the rising marginal cost section of the curve.
Operating Region
- The upward-sloping part of the marginal cost curve marks the operational range where cost increases with additional production.
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Explore key terms related to marginal cost with these flashcards. Each card provides a definition and context to enhance your understanding of production costs. Ideal for economics students looking to grasp fundamental concepts.
