Marginal Cost Concepts Flashcards

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.

Description

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.