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Single Input-Single Input-Output Output
RelationshipsRelationships
Key Cost RelationshipsKey Cost RelationshipsThe following cost derivations play a key role in decision-making:
Marginal cost = total cost ÷ output
Key Cost RelationshipsKey Cost RelationshipsThe following cost derivations play a key role in decision-making:
Marginal cost = total cost ÷ output
Averagevariable = total variable cost ÷ output cost
Key Cost RelationshipsKey Cost RelationshipsThe following cost derivations play a key role in decision-making:
Marginal cost = total cost ÷ output
Averagevariable = total variable cost ÷ output cost
Average total = total cost ÷ output cost
Costs associated with levels of outputCosts associated with levels of output
Page 102 in bookletPage 102 in booklet
Profit maximizinglevel of output,where MR=MC
Profit maximizinglevel of output,where MR=MC
P=MR=AR $45$45
11.211.2
Page 102 in bookletPage 102 in booklet
AverageProfit = $17, or
AR – ATC
AverageProfit = $17, or
AR – ATCP=MR=AR
$45-$28$45-$28
$28$28
Page 102 in bookletPage 102 in booklet
Grey area representstotal economic profitif the price is $45…
Grey area representstotal economic profitif the price is $45…
P=MR=AR
11.2 ($45 - $28) = $190.4011.2 ($45 - $28) = $190.40Page 102 in bookletPage 102 in booklet
Zero economic profitif price falls to PBE.Firm would only produceoutput OBE . AR-ATC=0
Zero economic profitif price falls to PBE.Firm would only produceoutput OBE . AR-ATC=0
P=MR=AR
Page 102 in bookletPage 102 in booklet
Economic lossesif price falls to PSD.Firm would shut downbelow output OSD
Economic lossesif price falls to PSD.Firm would shut downbelow output OSD
P=MR=AR
Page 102 in bookletPage 102 in booklet
Where is the firm’ssupply curve?
Where is the firm’ssupply curve?
P=MR=AR
Page 102 in bookletPage 102 in booklet
P=MR=AR
Marginal cost curveabove AVC curve?
Marginal cost curveabove AVC curve?
Page 102 in bookletPage 102 in booklet
Key Input RelationshipsKey Input RelationshipsThe following input-related derivations also play a key role in decision-making:
Marginal value = marginal physical product × price product
Key Input RelationshipsKey Input RelationshipsThe following input-related derivations also play a key role in decision-making:
Marginal value = marginal physical product × price product
Marginal input = wage rate, rental rate, etc. cost
5
B
C
D
E
FG
HI
J
Wage rate representsthe MIC for labor
Wage rate representsthe MIC for labor
Page 103 in bookletPage 103 in booklet
5
B
C
D
E
FG
HI
J
Use a variable input likelabor up to the point where the value received from the market equals the cost of another unit of input, or MVP=MIC
Use a variable input likelabor up to the point where the value received from the market equals the cost of another unit of input, or MVP=MIC
Page 103 in bookletPage 103 in booklet
5
The area below thegreen lined MVPcurve and above thegreen lined MICcurve representscumulative net benefit.
The area below thegreen lined MVPcurve and above thegreen lined MICcurve representscumulative net benefit.
B
C
D
E
FG
HI
J
Page 103 in bookletPage 103 in booklet
5
If you stopped at point E on the MVP curve, for example, you would be foregoing all of the potential profit lying to the right of that point up to where MVP=MIC.
If you stopped at point E on the MVP curve, for example, you would be foregoing all of the potential profit lying to the right of that point up to where MVP=MIC.
B
C
D
E
FG
HI
J
Page 103 in bookletPage 103 in booklet
5
If you went beyond the point where MVP=MIC, you begin incurring losses.
If you went beyond the point where MVP=MIC, you begin incurring losses.
B
C
D
E
FG
HI
J
Page 103 in bookletPage 103 in booklet
