Talk:Marginal cost/Archive 1

Archive 1

References?

Dupz do you have any references for your recent changes? They look a little bit like orginal research. Kappa 15:53, 28 September 2005 (UTC)

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Oh, this isnt any original research Kappa. My additions were made without the aid of any references as they form standard university materials. But I'm sure I could come up with a few reputable ones, if need be...?? Dupz 16:24, 28 September 2005 (UTC)

Your graph is representing a typical average cost function as Average cost(Q) := Cost(Q) / Q look up at the german article

Guido Lüchters mail@guidoluechters.de

Rewrite and sections moved

Information in top section moved to sections below, particularly where more specific or constituting sufficiently separate or specific topics that merit further discussion below, as well as keeping intro more general.

Section added on formulas and math, to show the relationship between marginal cost, average cost and total cost. Also re-wrote to reflect impression that existed before that marginal cost is related to fixed cost; I would argue it is not, if the definition of fixed cost is properly stated. (I recognise, however, there is some circularity to the definition). The math to show this is below (although my formatting, ahem, sucks).

I also moved the section on social costs to be part of externalities, rather than the other way around. I think it might be worth considering whether externalities merit a separate section here, since this is already covered in the pages on externalities and social cost, and may not need to be repeated here. I accept it is related, but marginal costs by definition only include those costs that vary with production; if they're not included or not paid, it should be obvious it's not part of MC. That said, it does affect the efficiency conclusions, so it is important.--Gregalton 18:49, 12 November 2006 (UTC)

"incremental cost" vs. "marginal cost"

Judging by the redirect at incremental cost, are "incremental cost" and "marginal cost" synonyms? If not, what's the difference? Neonumbers 00:21, 3 October 2007 (UTC)

MARGINAL COST

When the marginal product is falling (that is, when there are diminishing marginal returns to labor), the marginal cost of each home must be: —Preceding unsigned comment added by 152.21.10.215 (talk) 19:13, 24 February 2009 (UTC)

Marginal Cost Curve

I think the "Typical Marginal Cost Curve" graph is wrong. Labeling the curve as "MC" is in my opinion wrong. If the graph were truly a "Typical Marginal Cost Curve" graph, then the y axis would be MC and x axis would be quantity. It would start high, drop rapidly, and then level off to flat. The existing graph is not a MC curve. It is a "Total Cost" curve, showing the total cost versus total quantity. Once the quantity reaches a high number, MC levels off, whereas total cost continues to rise. —Preceding unsigned comment added by 76.252.188.64 (talk) 03:35, 4 July 2009 (UTC) In the short run increasing production requires using more of the variable input - conventionally assumed to be labor. Adding more labor to a fixed capital stock reduces the marginal product of labor because of the diminishing returns. This reduction in productivity is not limited to the additional labor needed to prodgwertgrqtgrqetgggggggggggrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrduce the marginal unit - the MPL of every unit of labor is reduced. Thus the costs of producing the marginal unit of output has two components - the costs directly attributable to hiring the additional labor needed to produce the marginal unit and the increase in average costs for all units produced due to the “damage” to the entire productive process. Id.

The MC graph is mislabeled. The y-axis should be labeled "MC" for marginal cost and the x-axis, q or y for output since the graph depicts the relatioship between marginal cost and output. When the major cost curves are all shown on one two dimensional graph the convention is to simply label the y-axis "C" for cost. One could label the axis "C, MC, FC, AC & AVC".

Marginal cost is NOT the cost of producing the "next" or "last" unit.

Marginal cost is not the cost of producing the "next" or "last" unit. —Preceding unsigned comment added by Jgard5000 (talk • contribs) 20:44, 11 August 2009 (UTC) Silberberg & Suen, The Structure of Economics, A Mathematical Analysis 3rd ed. (McGraw-Hill 2001) at 181. As Silberberg and Suen note the cost of the last unit is the same as the cost of the first unit and every other unit. In the short run increasing production requires using more of the variable input - conventionally assumed to be labor. Adding more labor to a fixed capital stock reduces the marginal product of labor because of the diminishing marginal returns. This reduction in productivity is not limited to the additional labor needed to produce the marginal unit - the productivity of every unit of labor is reduced. Thus the costs of producing the marginal unit of output has two components:

the cost associated with producing the marginal unit

and the increase in average costs for all units produced due to the “damage” to the entire productive process (∂AC/∂q)q. Id.

The first component is the per unit or average cost. The second unit is the small increase in costs due to the law of diminishing marginal returns which increaes the costs of all units of sold.

Therefore, the correct formula is MC = AC + (∂AC/∂q)q.

Marginal costs can also be expressed as the cost per unit of labor divided by the marginal product of labor. See http://ocw.mit.edu/NR/rdonlyres/Economics/14-01Fall-2007/F4843AF1-1F54-46B5-A2BA-AE728225F274/0/14_01_lec13.pdf. MC = ∆VC∕∆q; ∆VC = w∆L; ∆L∕∆q the change in quantity of labor to affect a one unit change in output = 1∕MPL. Therefore MC = w∕MPL Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [12 Sept 2009].

The following discussion of the marginal product of labor equally applicable to marginal costs:

Thirdly, it is important to underline that the marginal product is not, properly speaking, the contribution of the marginal unit by itself….The second man may very well produce nine or ten or eleven and still the total output increases only to eighteen because the first man reduces his output to nine, or eight or seven in the presence of the second. In our example, output increases from ten bushels to eighteen bushels when one adds the second man not because the second man only adds eight, but rather because his presence on the field makes the situation such that the total output of both men is eighteen. Notice that the contribution per man is reduced: the average product is actually nine. This may very well be how much each of the two laborers contributes. But this is not what interests us: what we wish to note is that by adding the second man, output was increased by eight. Thus, the marginal product of the second man is eight. But his actual contribution may be very different than this. [8]http://homepage.newschool.edu/het//essays/product/prodfunc.htm#marginal

In discussing marginal cost several things must be kept in mind. First, the behavioral assumption underlying the cost functions is that firms are profit maximizer/cost minimizers. Secondly, the cost functions show the minimum cost to produce a given output which means that the firm is using the optimum short run capital labor ratio. Third, in the short run a firm can increase production and conform to the cost minimizing assumption only by increasing the use of the variable input by an amount that produces the desired output at the minimum additional cost. Marginal cost is this minimum increase in cost attributable to an increase in output.Silberberg & Suen, The Structure of Economics, A Mathematical Analysis 3rd ed. (McGraw-Hill 2001) at 179. A firm could produce the marginal unit without "hiring" additional labor but to do so would violate the behavioral assumption of the model. Likewise a firm could hire more labor than was necessary to produce the marginal unit at minimum cost. In either case the marginal cost would increase by an extent exceeding the minimum increase necessary to produce the marginal unit.

Miscellaneous

I have a problem with the following quote, especially the last parts:

"Marginal cost is not the same as average unit cost. The average unit cost considers the cost of every unit. The marginal cost ignores all units except the last. For example, the average cost per car includes the heavy fixed cost to produce the first car (divided among all the cars produced). The marginal cost does not include that fixed cost at all."

To say that fixed costs are not included in the calculation of marginal costs is actually false. The formula given in the article states that we need both Total Costs and Quantity. Total Cost is derived by adding Variable AND Fixed Costs. Fixed costs most definately have a hand in marginal cost.

I'll delete this paragraph for now. ( should distinguish between short and long run marginal costs )

Dupz 04:07, 28 September 2005 (UTC)

Mathematically, of course, if fixed costs are truly fixed in the economics sense (changing quantity does not change fixed costs), then the value of MC is not related to fixed costs; since this is central to the meaning of fixed costs, it's worth including this point. This only holds when the TC formula is such that TC = FC + f(q) , where f(q) is the production function; in this case the FC term simply drops out in the first derivative.

The problem is the fixed cost definition, which can be rather loose. The usual dodge is to specify fixed as in the relevant period; therefore, fixed costs for production choices for "today" exclude almost everything except raw inputs (if I can't reduce labour today), but over the longest term feasible, there would be few if any fixed costs. Another way of looking at this is that the definition of fixed cost (as related to marginal cost and total cost) is circular: is the marginal cost related to fixed cost? If yes, then the fixed cost over the relevant time period is not fixed; adjust and repeat as necessary.--Gregalton 17:16, 12 November 2006 (UTC)

The quote is incorrect for the reasons stated below - "misconceptions." —Preceding unsigned comment added by Jgard5000 (talk • contribs) 10:30, 13 September 2009 (UTC)

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Kappa, you're quite right in your simple definition, but it's the underlying costs and trends in such marginal costs that are of greatest interest in economic theory.

Dupz 04:07, 28 September 2005 (UTC)

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simple meaning of margonal cost?

• The cost of one extra thing. Kappa 22:18, 27 September 2005 (UTC)

Other cost definitions

Technically variable costs are the expenses incurred for variable inputs. Since the assumption is that labor is the variable input and that the wage rate is fixed, variable costs equal the amount of labor employed times the wage rate. Fixed cost are cost associated with fixed inputs those factors of production that cannot be changed in the short run. In a simple two factor operation capital, K, is assumed to be the fixed factor and labor, L, is assumed to be the variable factor. Thus fixed cost equal K x r (r being the return on capital) and variable costs equal L x w (w being the wage rate). As noted K, r and w are fixed in the short run. The only variable that can be modified is L. To increase (decrease) production you have to increase (decrease) the amount of labor used. Marginal costs can be expressed as ∆C∕∆Q which is equivalent to (∆C∕∆L) ÷ (∆Q∕∆L). (∆C∕∆L) is simply the wage rate, w and (∆Q∕∆L) is the Marginal product of labor, MPL. So short run margianl costs = w∕MPL. This tells us that is more labor is employed the marginal product of labor falls due to the law of diminishing returns (denominator decreases) while the wage rate remains constant (numerator unchanged). The combined effect is that as more labor is hired to increase production, labore being the only variable input, the firms costs increase, This increase in costs is called marginal costs. It is equal to the change in variable costs. Two important caveats. It is assumed that firms are cost minimizers. That is they will use that combination of K and L that produces a given output at the minimum cost. The marginal cost is simply the minimum increase in cost resulting from an increase in output. --Jgard5000 (talk) 17:51, 15 September 2009 (UTC)jgard5000 Secondly, MC is not precisely the cost of the last unit produced. As noted there are expenses associated with hiring the labor necessary to produce the marginal unit - the cost is w. However, there is an additional cost incurred. As noted above adding labor causes the MPL to fall that is the efficiency of the entire productive process is reduced - the additional worker reduces the productivity of every other worker - as economist are want to say "they get in each other's way."--Jgard5000 (talk) 17:58, 15 September 2009 (UTC)jgard5000

Traffic Jam

One of best illustrations of relationship between marginal and average cost is freeway congestion example originally developed by Frank Knight and discussed by Silberberg and Suen on page The Structure of Economics. Assume that a section of freeway is our factory and that the objective is to move cars along the freeway at the minimum costs in terms of travel time. Assume also that an additional car entering the freeway when it is un-congested has no effect on the average travel time of the others cars already on the highway. Nor do the other cars affect the travel time of the additional vehicle. Finally assume that the travel time on the uncongested highway is 30 minutes.

Now assume that there are ten cars traveling on the section of the highway and that ten cars is the point of capacity. The entry of the eleventh car immediately creates congestion increasing everyone’s travel time to 32 minutes. The question is what is the marginal cost in terms of travel time of the entry of the eleventh car onto the highway? The typical repsonse is that the marginal cost is the time spent by the eleventh car - 32 minutes - the cost of the last unit. This conclusion understates the cost of the entry of the additional car. After entry of the eleventh car the average time for each vehicle is 32 minutes. Thus the marginal cost of adding the 11 car is its own 32 minuted of travel time plus 2 extra minutes "imposed on each of the other ten cars' or 10 x 2 or 20 minutes for a total of 52 minutes.--Jgard5000 (talk) 21:29, 15 September 2009 (UTC)jgard5000. In plain language when the eleventh car enters the highway it presence intereferes with the use of the highway by the other ten drivers plus the presence of the other ten drivers interferes with the eleventh driveres use of the highway. This damage to the production process is precisely what happens when the additional labor is added to produce the marginal unit of output. The new worker creates "congestion" in the workplace that reduces the productivity of every worker. --Jgard5000 (talk) 20:13, 16 September 2009 (UTC)jgard5000

This is consistent with the mathematical expression of MC. The formula is MC = AC + (dAC/dq)q. In terms of the congested freeway MC equals the average cost of the eleventh car (32 minutes) plus the change in AC with respect to the ten cars times the number of cars (32 - 30) x 10 = 20) or MC = 32 + 20 = 52 minutes which conforms to the formula. It is important to understand the misleading nature of the statement the marginal cost is the cost of producing the last unit. In the freeway example the average cost of the last car is the same as the cost of all other cars or 32 minutes.--75.250.211.62 (talk) 11:35, 17 September 2009 (UTC)jgard5000

Marginal Costs not affected by changes in fixed cost

Marginal Costs are not affected by changes in fixed cost. Marginal costs can be expressed as ∆C(q)∕∆Q. Since fixed costs do not vary with (depend on) changes in quantity, MC is ∆VC∕∆Q. Thus if fixed cost were to double MC would not be affected and consequently the profit maximizing quantity and price would not change.--Jgard5000 (talk) 12:49, 17 September 2009 (UTC)jgard5000 this can be ilustrated by graphing the short run total cost curve and the short run variable cost curve. The shape of the curves are identical. Each curve initially increases at a decreasing rate reaches and inflection point then increases at a decreasing rate. the only difference between the curves is that the SRVC curve begins from the origin while the SRTC curve originates on the y-axis. The distance of the origin of the SRTC above the origin represents the fixed cost - the vertical distance between the curves. This distant remains constant as the quantity produced Q increases. MC is the slope of the SRVC curve. A change in fixed cost would be reflected by a change in the vertical distance between the SRTC and SRVC curve. Any such change would have no effect on the shape of the SRVC curve and therefore its slope at any point - MC.--Jgard5000 (talk) 13:27, 17 September 2009 (UTC)jgard5000

Perfectly Competitive Supply Curve

The portion of the marginal cost curve above its intersection with the average varaible cost curve is the supply curve for a firm operating in a perfectly competitive market. (te portion of the MC curve below its intersection with the AVC curve is not part of the supply curve becuase a firm would not operate at price below the shut down point) This is not true for firms operating in other market structures. For example, while a monopoly "has" an MC curve it does not have a supply curve. --Jgard5000 (talk) 11:50, 17 September 2009 (UTC)jgard5000 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.--Jgard5000 (talk) 14:45, 17 September 2009 (UTC)jgard5000 It all depends on the shape and position of the demand curve and its accompanying marginal revenue curve.--Jgard5000 (talk) 14:48, 17 September 2009 (UTC)Jgard5000

Economies of Scale - Redux

As Binger and Hoffman note on pages 284&85, "When there is only one variable input, three important properties of short run cost functions follow from an assumption of diminishing returns to the variable input." First, the SRMC curve is increasing with output. Second, the SRAVC curve will "eventually rise." And third, the SRATC curve is U-shaped. These properties also follow from "constant and diminishing returns to scale."Id at 285. The first property follows from the fact that SRMC = w/MPL where w is the wage rate and MPL is the marginal product of labor. The assumption of diminishing retuns means that MPL is declining and given that w is assumed to he constant then SRMC must be rising. w is assumed to be constant because the factors markets are assumed to be perfectly competitive implying that a firm can acquire all the units of labor it desires at the prevailing wage rate. the second property follows from the relationship between the MPL and the average product of labor, APL. Assuming diminishing returns the MP_L must be falling. However this does not mean that the APL is falling as well. If the MPL is falling but is above the APL the APL will be rising at a decreasing rate. The property however is true because the MPL intersects the APL curve at the APL curve's maximum value and thereafter the MPL curve is below the APL curve and continuously falling. Beyond the interesection of the MP_L and AP_L curves the average product of labor will necessarily be falling. the SRAVC curve equals w/AP_L. thus once the AP_L has moved beyond it maximum and is continuously falling the SRAVC is simultaneously rising.--Jgard5000 (talk) 20:16, 17 September 2009 (UTC)jgard5000

The third property is that the SRATC curve is U-shaped. --Jgard5000 (talk) 16:00, 18 September 2009 (UTC)jgard5000. The shape of the SRATC curve is determined by the firm's production function. In the short run, the only way a firm can increase production is by increasing the amount of labor. As additional units of labor are added eventually the firm reaches the point of diminishing marginal returns. --75.201.210.191 (talk) 20:06, 18 September 2009 (UTC)jgard5000 Once the point of diminishing marginal returns is reached the Marginal product of labor decreases, --75.251.34.193 (talk) 20:25, 18 September 2009 (UTC)jgard5000 The production function determines the shape of the various costs curves. If the production function exhibits diminishing marginal returns then the SRATC and the SRAVC will have the typical U-shape.--Jgard5000 (talk) 21:32, 18 September 2009 (UTC)jgard5000

The distinctive u shape of the SRATC curve is due to the influence of two separate cost functions - average fiexed cost and average variable costs. The initial downward slope of the curve is largely due to the influence of average fixed cost which continuously falls as production increases. At low levels of production fixed costs is the dominant element of total costs. Average variable cost initially may briefly drop but then quickly bottoms out and begins to rise due to increasing marginal costs. The upward tendency of the average variable cost curve overwhelms the weakening influence of the AFC curve and accounts for the upward slope of the SRATC.Jgard5000 (talk) 00:38, 2 November 2009 (UTC)jgard5000Jgard5000 (talk) 00:38, 2 November 2009 (UTC)

MC Curve - Shifts

As traditionally graphed the only thing that would cause an MC curve to shift in the short run would be a change in the wage rate, w. --Jgard5000 (talk) 12:54, 17 September 2009 (UTC)jgard5000 On further reflection this is wrong. Jgard5000 (talk) 19:52, 2 November 2009 (UTC)jgard5000Jgard5000 (talk) 19:52, 2 November 2009 (UTC) Changes in any parameter will cause the curve to shift including the price of the input, the quantity of the fixed input, and changes in technology. Jgard5000 (talk) 20:00, 2 November 2009 (UTC)jgard5000Jgard5000 (talk) 20:00, 2 November 2009 (UTC)

media and sociology

It starts "In media and sociology,..." That seems very strange to me. Economics is the one discipline I think of when it comes to MC, not media and sociology. Derek Pyne2 (talk) 00:47, 24 October 2010 (UTC)