Micro Chap. 7

Shows the minimum.attainable costs of production, given a particular level ofteclmology and set of input prices /Total cost represents the lowest total dollar expense needed to produce each level of output Q . TC rises as Q rises. Fixed cost represents the total dollar expense that is paid out even when no output is produced; f xed cost is unaffected by any variation in the quantity of output. Variable cost represents expenses that vary with the level of output—such as raw materials, wages, and fuel—and includes all costs that are not f xed. Always, by def nition, TC = FC + VC

The extra cost required to produce 1 extra unit of output/The marginal cost of production is the additional cost incurred in producing 1 extra unit of output.

Total cost divided by the number of units produced./Average cost = total cost : output (TC:q = ATC)

1. When marginal cost is below average cost, it is pulling average cost down. 2. WhenMC is aboveATC, it is pulling upATC . 3. WhenMC just equalsATC, ATC is constant. At the bottom of a U-shapedATC, MC ATC minimum ATC / To summarize: In terms of our cost curves, if the MC curve is below theATC curve, theATC curve must be falling. By contrast, ifMC is aboveATC,ATC is rising. Finally, whenMC is just equal toATC, theATC curve is f at. The ATC curve is always pierced at its minimum point by a rising MC curve.

In the short run, when factors such as capital are f xed, variable factors tend to show an initial phase of increasing marginal product followed by diminishing marginal product. The corresponding cost curves show an initial phase of declining marginal costs, followed by increasingMC after diminishing returns have set in.

the ratio of the marginal product of an input to its price is equal for all inputs./To produce a given level of output at least cost, a f rm should buy inputs until it has equalized the marginal product per dollar spent on each input. This implies that à marginal product of L : Price L = Marginal product of A : price of A = …

If the price of one factor falls while all other factor prices remain the same, f rms will prof t by substituting the now-cheaper factor for the other factors until the marginal products per dollar are equal for all inputs.

Net income (or prof t) = total revenue - total expenses