User:Jgard5000/Article 3

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 costs directly attributable to hiring the additional labor needed to produce the marginal unit (AC) and the increase in average costs for all units produced due to the “damage” to the entire productive process (∂AC/∂q)q. Id. Therefore, the correct formula is MC = AC + (∂AC/∂q)q. Id. 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]. 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. [edit]Economies of Scale 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 response 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 interferes with the use of the highway by the other ten drivers plus the presence of the other ten drivers interferes with the eleventh drivers 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 [edit]Perfectly Competitive Supply Curve 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. (the portion of the MC curve below its intersection with the AVC curve is not part of the supply curve because 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