Marginal cost and average total cost (video) | Khan Academy
This mathematical relation between average and marginal surfaces cost ( average total cost and marginal cost), and revenue (average revenue and marginal. Marginal Cost Curve and the Average Total Cost Curve. Learn the different types of economic cost curves and the law of diminishing returns. For example, average cost (AC), also called average total cost, is the total cost divided Analogy for Average and Marginal Cost Relationship.
These are going to be fixed, at least for the next year. Now, my variable costs, here, these are going to be given the amount of juice I want to produce. This is going to be the cost of the oranges, and I guess we can also say the cost of transporting the oranges, and so we see here, obviously if we produce no oranges, we have no variable cost. If we produce 2, it'sand something interesting happened.
The first 1, oranges wasand then the next 1, it was only So what's happening here is I've probably got some economies I've probably got some negotiating power now with some of these suppliers. I'm like, "Look, I'm buying a lot more oranges now. The incremental from this to this is only Then it starts getting more expensive again. What's probably happening is, as I start buying more and more oranges from the local distributors, I get a better, better deal. They view me as a bigger and bigger customer, but once I tap them out, then I have to go further and further away.
Maybe it's costing more to transport them, or maybe these other suppliers don't take me as seriously or I go to slightly more expensive suppliers because I've tapped out all of the cheap ones, and so my incremental variable costs for the next 1, and we'll think about that later, keeps going up and up and up.
The total costs, obviously, are just the sum of my fixed costs and my variable costs.
RELATION BETWEEN AVERAGE COST AND MARGINAL COST IN SHORT RUN – Learn Economics
Let's calculate using, and I'm just using Excel, here. Let's calculate the average fixed cost, so we don't want to divide by zero. Remember, the average cost, the average fixed and the average variable and the average total cost, these are each of those costs divided by the total amount of juice that I'm producing. You can kind of view them as the cost per gallon. So that we're thinking of the average fixed cost per gallon, so what we're going to do, so I'm writing equal to let Excel know that I'm doing a formula now, this is going to be equal to my fixed cost divided by, so divided by, divided by my gallons, and you can see that's G8 divided by F8, and actually, I guess you can't see my Gs and Fs, but this is the 8th row.
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To illustrate the basic nature of the average-marginal relation consider an example. Suppose that there is a room containing five people that have been painstakingly and accurately measured for height.Marginal cost and average total cost - Microeconomics - Khan Academy
The average height of this group is 66 inches 5' 6". Some are taller than 5' 6" and some are shorter, but the average is 5' 6". What happens to this 5' 6" average should a sixth person enter the room?
This surely depends on the height of this extra person, this marginal addition to this group, does it not? If this "marginal" person is 6' tall, then the group's average rises to exactly 5' 7". The marginal is greater than the average, and the average rises.
If the marginal sixth person is, however, a mere 5' tall, the marginal is less than the average, then the average declines to 5' 5". For this generic case, minimum average cost occurs at the point where average cost and marginal cost are equal when plotted, the marginal cost curve intersects the average cost curve from below ; this point will not be at the minimum for marginal cost if fixed costs are greater than 0.
Perfectly competitive supply curve[ edit ] The portion of the marginal cost curve above its intersection with the average variable cost curve is the supply curve for a firm operating in a perfectly competitive market. For example, while a monopoly "has" an MC curve it does not have a supply curve.
In a perfectly competitive market, a supply curve shows the quantity a seller's willing and able to supply at each price — for each price, there is a unique quantity that would be supplied. The one-to-one relationship simply is absent in the case of a monopoly. With a monopoly, there could be an infinite number of prices associated with a given quantity.
It all depends on the shape and position of the demand curve and its accompanying marginal revenue curve. Decisions taken based on marginal costs[ edit ] In perfectly competitive markets, firms decide the quantity to be produced based on marginal costs and sale price.
If the sale price is higher than the marginal cost, then they supply the unit and sell it. If the marginal cost is higher than the price, it would not be profitable to produce it. So the production will be carried out until the marginal cost is equal to the sale price.
In other words, firms refuse to sell if the marginal cost is greater than the market price. Thus if fixed cost were to double, the cost of MC would not be affected, and consequently, the profit-maximizing quantity and price would not change.
This can be illustrated by graphing the short run total cost curve and the short-run variable cost curve. The shapes of the curves are identical. Each curve initially increases at a decreasing rate, reaches an inflection point, then increases at an increasing rate.