Explain the relationship between marginal cost and product

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explain the relationship between marginal cost and product

The correspondence between the marginal product and marginal cost curves supply curve can be explained in the short run by increasing marginal cost. The relationship between the marginal product of labor and the marginal cost helps determine whether it is worthwhile to produce additional products. Get an answer for 'What is the relationship between marginal costs and Therefore, the slope of the total variable cost curve is the marginal cost of the product.

Conversely, there may be levels of production where marginal cost is higher than average cost, and the average cost is an increasing function of output. 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.

What Is the Connection between Marginal Cost and Marginal Product?

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.

  • Explain the Relationship Between the Marginal Product of Labor & Marginal Cost
  • Marginal cost

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.

Marginal cost - Wikipedia

Each curve initially increases at a decreasing rate, reaches an inflection point, then increases at an increasing rate. The distance of the origin of the SRTC above the origin represents the fixed cost — the vertical distance between the curves. This distance remains constant as the quantity produced, Q, increases.

explain the relationship between marginal cost and product

Private versus social marginal cost[ edit ] Main article: Social cost Of great importance in the theory of marginal cost is the distinction between the marginal private and social costs.

The marginal private cost shows the cost associated to the firm in question. It is the marginal private cost that is used by business decision makers in their profit maximization goals. Marginal social cost is similar to private cost in that it includes the cost of private enterprise but also any other cost or offsetting benefit to society to parties having no direct association with purchase or sale of the product. The correspondence between the marginal product and marginal cost curves indicates that the law of diminishing marginal returns is the key reason for increasing marginal cost.

This further implies that the law of supply and the positively-sloped supply curve can be explained in the short run by increasing marginal cost. Marginal Cost and Marginal Product This diagram displays the marginal product and marginal cost for the production of Wacky Willy Stuffed Amigos those cute and cuddly armadillos, tarantulas, scorpions, and rattlesnakes.

The top panel presents the marginal product of the variable input used to produced Stuffed Amigos. The bottom panel contains the marginal cost of producing Stuffed Amigos. The marginal product curve in the upper panel has a distinctive hump-shape, with marginal product rising, reaching a peak, then falling.

The rising portion of the marginal product curve is the result of increasing marginal returns. The falling portion is attributable to decreasing marginal returns, and in particular, the law of diminishing marginal returns.

The marginal cost curve in the lower panel has a distinctive U-shape, with marginal cost falling, reaching a minimum, then rising.

The falling portion of the marginal product curve is the result of increasing marginal returns. The rising portion is attributable to decreasing marginal returns, and in particular, the law of diminishing marginal returns.

The marginal cost curve can be thought of as something of a "reflection" of the marginal product curve. This reflection is not a perfect image, but it captures the essence of the shape.

How does this work?

explain the relationship between marginal cost and product

Increasing Marginal Returns In production Stage I, with increasing marginal returns, marginal cost declines. Because each additional worker is increasingly more productive, a given quantity of output can be produced with fewer variable inputs. Consider an extreme example.