1
Interest
Payments
8
5
10
15
20
17
15
13
12
10
8
6
5
VC
MC
0
50 10.00
100 5.00
150
3.33
200 2.50
250 2.94
300 3.33
350 3.85
400 4.17
450 5.00
500 6.25
550 8.33
600 10.00
MC Increases
MP
MP decreases
Q
0
5
15
30
50
67
82
95
107
117
125
131
136
MP
Increases
L
0
1
2
3
4
5
6
7
8
9
10
11
12
MC
Decreases
From MP to MC
MP
5
10
15
20
17
15
13
12
10
8
6
5
MP decreases
Q
0
5
15
30
50
67
82
95
107
117
125
131
136
MP
Increases
L
0
1
2
3
4
5
6
7
8
9
10
11
12
VC
0
1 50
worker10.00
= $50
2100
workers5.00
= $100
3150
workers3.33
= $150
200 2.50
250 2.94
300 3.33
350 3.85
400 4.17
450 5.00
500 6.25
550 8.33
600 10.00
Wage
=$50/day
MC Increases
From MP to MC
MC
Decreases
Assume that
labor is the
MC ONLY variable
cost
5
10
15
20
17
15
13
12
10
8
6
5
VC
MC
0
50 10.00
100 5.00
150
3.33
200 2.50
250 2.94
300 3.33
350 3.85
400 4.17
450 5.00
500 6.25
550 8.33
600 10.00
MC Increases
MP
MP decreases
Q
0
5
15
30
50
67
82
95
107
117
125
131
136
MP
Increases
L
0
1
2
3
4
5
6
7
8
9
10
11
12
MC
Decreases
From MP to MC
Marginal Cost
5
10
15
20
17
15
13
12
10
8
6
5
$50
$50
Wage
VC
0
50
100
150
200
250
300
350
400
450
500
550
600
MC
$50/5=$10
10.00
5.00
$50/10=$5
$50/15=$3.3
3.33
$50/20=$2.5
2.50
$50/17=$2.9
2.94
3.33
$50/15=$3.3
$50/13=$3.8
3.85
MC Increases
MP
MP decreases
Q
0
5
15
30
50
67
82
95
107
117
125
131
136
MP
Increases
L
0
5units
1
10units
2
MP 3
4
5
6
7
8
9
10
11
12
MC = DVC/DQ
4.17
5.00
6.25= wage/MP
MC
8.33
10.00
L
Q
MP
Wage0is the 0same
1
5MP 5
Increasing
2
15
10
3
30
15
4
50
20
5
67
17
6
82
15
7
95
13
8
107
12
9
117
10
10
125
8
Wage11is the131
same 6
Decreasing
MP 5
12
136
VC MC
MC= wage/MP
0
50 10.00
100 5.00 =Decreasing
150
3.33
MC
200 2.50
250 2.94
300 3.33
350 3.85
400 4.17
=Increasing
450 5.00
MC
500 6.25
550 8.33
600 10.00
MC Increases
MP decreases
MC
Decreases
MC = DVC/DQ
MP
Increases
From MP to MC
5
10
15
20
17
15
13
12
10
8
6
5
VC
MC
0
50 10.00
100 5.00
150
3.33
200 2.50
250 2.94
300 3.33
350 3.85
400 4.17
450 5.00
500 6.25
550 8.33
600 10.00
MC Increases
MP
MP decreases
Q
0
5
15
30
50
67
82
95
107
117
125
131
136
MP
Increases
L
0
1
2
3
4
5
6
7
8
9
10
11
12
MC
Decreases
From MP to MC
MP
Diminishing Returns to Labor
When the MPset
is at
in its Maximum
MC
Labor
L0
MP
MC
Diminishing Returns to Labor
The MC is
setatinits Minimum
Q0
Units of Output
From VC to TC: add FC
L
Q
MP VC
MC
FC
TC
MC
50,000 50,000
0
0
0
1
5
5
50 10.00 50,000
10.00
2
15
10
100 5.00 50,000
5.00
3
30
15
150
3.33 50,000
3.33
4
50
20
200 2.50 50,000
2.50
5 Total
67 cost
17 of250 2.94
2.94
6 producing
82
15 zero
300 3.33
3.33
TC
=
FC
+
VC
units
=
50,000
7
95
13
350 3.85
3.85
50,000 = FC
+ VC
8 107
12
400 4.17
4.17
50,000 = FC
+0
cost of
9 Variable
117
10
450 5.00
5.00
FC = 50,000
10 producing
125
8 zero
500 6.25
6.25
11
131
8.33
units 6= 0 550 8.33
12 136
5
600 10.00
10.00 17
Marginal Cost
Cost of “the last” unit produced.
– When one more unit is produced, the fixed
cost does not change.
– Is the cost of labor, raw materials and
other variable expenses incurred when
producing an additional unit.
18
Marginal Cost
Formula
MC = DTC/DQ
D FC = 0
MC = (DFC + DVC) /DQ
MC = rise/run
MC is the slope of both the
MC = slope
and theDTC
slope= of
the when
VC
TC
Because
DVC
one more
unit
is produced, we can also write:
MC = DVC/DQ
TC and VC
have
the additional
exact sameVariable
slope
 Marginal
cost
is the
TCof
and
VC have the
same
Cost
producing
oneexact
more
unitshape
L
0
1
2
3
4
5
6
7
8
9
10
11
12
Q
MP VC
MC
FC
TC
0
0
50,000 50,000
5
5
50 10.00 50,000 50,050
15
10
100 5.00 50,000 50,100
30
15
150
3.33 50,000 50,150
50
20
200 2.50 50,000 50,200
67
17
250 2.94 50,000 50,250
82
15
300 3.33 50,000 50,300
95
13
350 3.85 50,000 50,350
107
12
400 4.17 50,000 50,400
117
10
450 5.00 50,000 50,450
125
8
Total Cost
=500 6.25 50,000 50,500
131
6
Fixed
Cost
+550 8.33 50,000 50,550
136
5
600 10.00 50,000 50,600
Variable Cost
MC
10.00
5.00
3.33
2.50
2.94
3.33
3.85
4.17
5.00
6.25
8.33
10.00
20
L
Q
MP
0
0
1
5
5
2
15
10
3
30
15
4 50
20
5
67
17
6 82
15
7
95
13
8 107
12
9 117
10
10 125Cost8=
Total
11 131
Fixed
Cost6+
12 136
5
Variable Cost
VC MC
FC
TC
0
50,000 50,000
50 10.00 50,000 50,050
100 5.00 50,000 50,100
150 3.33 50,000 50,150
200 2.50 50,000 50,200
250 2.94 50,000 50,250
300 3.33 50,000 50,300
350 3.85 50,000 50,350
400 4.17 50,000 50,400
450 5.00 50,000 50,450
500 6.25 50,000 50,500
550 8.33 50,000 50,550
600 10.00 50,000 50,600
21
L
Q
MP
VC
MC
FC
TC
MC
0
0
0
50000 50000
DQ
D
VC
DTC 50050
1
5
5
50
50000
50
102
50 50100 5.00
15
10
100 5.00 50000
3
30
15
150
50000 50150
4
50
20
200
50000 50200
5MC can
67be 17
250
50000 50250
6calculated
82
15
300
50000 50300
=DVC/DQ 50000 50350
7
95VC 13 MC 350
using
the
8or the107
12
400
50000 50400
TC
MC =DTC/DQ
9
117
10
450
50000 50450
10
125
8
500
50000 50500
DQ
D
VC
D
TC 50550
11
131
6
550
50000
50
512
50 50600 10.00
136
5
600 10.00 50000
MC =DVC/DQ
L
0
1
2
3
4
5
6
7
8
9
10
11
12
Q
0
5
15
30
50
67
82
95
107
117
125
131
136
MP
5
10
15
20
17
15
13
12
10
8
6
5
VC
0
50
100
150
200
250
300
350
400
450
500
550
600
MC
10.00
5.00
3.33
2.50
2.94
3.33
3.85
4.17
5.00
6.25
8.33
10.00
MC =DTC/DQ
FC
50000
50000
50000
50000
50000
50000
50000
50000
50000
50000
50000
50000
50000
TC
50000
50050
50100
50150
50200
50250
50300
50350
50400
50450
50500
50550
50600
MC
10.00
5.00
3.33
2.50
2.94
3.33
3.85
4.17
5.00
6.25
8.33
10.00
Marginal Cost
Tells you how the Variable cost
changes as more output is produced
MC =DVC/DQ
It is the slope of the Variable Cost
24
Variable Cost
MC
MC
10
5
3.3
2.5
2.9
3.3
3.8
4.2
5
6.3
8.3
10
Slope Increase
Output
VC
VC
0
0
50
50
100
100
150
150
200
200
250
300
350
400
450
500
550
600
Slope
Decrease
Starts at the Origin
Q
Q
0
0
5
5
15
15
30
30
50
50
67
82
95
107
117
125
131
136
Determine whether each of the following cost items, or
categories would most likely be a fixed cost (FC) or a
variable cost (VC).
1. Labor
2. Raw materials
3. Rent for building and land
4. Advertising
5. Sales commissions
6. Shipping costs to retail outlets
7. Research and development
8. Interest expense on loans
9. Fire and theft insurance
10. Owner's required annual profit of $75,000
26
Determine whether each of the following cost items, or
categories would most likely be a fixed cost (FC) or a
variable cost (VC).
1. Labor VC or FC
2. Raw materials VC
3. Rent for building and land FC
4. Advertising FC
5. Sales commissions FC
6. Shipping costs to retail outlets VC
7. Research and development FC
8. Interest expense on loans FC
9. Fire and theft insurance FC
10. Owner's required annual profit of $75,000 FC
27
MC
Starts at FC
FC
Starts at the Origin
Output
ATC = AVC + AFC
29
ATC =29
20
AFC =20
AVC
ATC = 19
19
15
9
ATC
ATC
AVC =9
AVC = 15
AFC
AVC
4
AFC = 4
AFC
Q=2
Q=10
39
AVC, AFC, ATC
29
ATC
AVC
AFC
19
Distance between AFC
the ATC and AVC = AFC
15
9
AFC
Q=2
AFC
Q=10
The Relationship between Average
and Marginal costs
If MC > Average
Cost, the Average Cost
AVC or ATC
increase.
AVC or ATC
If MC < Average
Cost, the Average Cost
decrease.
AVC or ATC
If MC = Average
Cost, the Average Cost
does not increase or decrease: it is
maximum.
41
ATC
MC
AVC
MC = ATC, ATC
minimum
MC = AVC, AVC
minimum
Q
MP is max
MP, AP
MC, AC
AP is max
MP
AP
MC
AVC
L
AVC is min
MC is min
Q
MC cuts the ATC and the AVC
at their MINIMUM points
ATC
MC
AVC
Min ATC
Min AVC
Min MC: Diminishing
returns to labor set in
Reach Minimum at different
Output levels
44
From Average Costs to Total
Costs
ATC = TC/Q
AVC = VC/Q
AFC = FC/Q
Rearrange as
TC =ATC x Q
VC = AVC x Q
FC = AFC x Q
Per unit Costs
ATC
Cost of producing
the LAST unit
MC
AVC
MC
ATC
AVC
ATC x Q = TC
FC
AVC x Q = VC
TC
VC
AFC x Q = FC
Q
AFC =ATC - AVC
46
Cost of producing
the120th unit
20
FC = 120*(20-10)
ATC = 20
10
TC = 120*20
AFC=20 -10= 10
AVC = 10
VC = 120*10
120
For Q = 120
44
40
24
20
FC = 300*(24-20)
VC = 300*20
10
50
120
TC = 300*24
300
For Q = 300
48
44
40
24
20
10
10 50
120
300
49
Use the graph in the next slide to
calculate for Q = 50, Q = 120, Q = 300
1. Variable Cost
2. Total Cost
3. Average Variable Cost
4. Average Total Cost
5. Marginal Cost of the last unit
6. Fixed Cost.
7. Average Fixed Cost
50
FC=
TC =
TR =
Q = 100
VC =
AFC=
ATC =
AVC =
MC
ATC AVC
10
8
6
20
50
100
150 170
51
Calculate for Q =20,000
1.
Variable Cost
2.
Total Cost
3.
Average Variable
Cost
4.
Average Total Cost
5.
Fixed Cost.
6.
Average Fixed
Cost
12,000
11,000
10,000
?
10,000 20,000
52
ATC = TC/Q
ATC = 12,000/20,000
ATC = 0.6
TC
VC
12,000
11,000
10,000
?
FC = 2,000
AFC = FC/Q
AFC = 2,000/20,000
AFC = 0.1
VC = 10,000
TC = 12,000
AVC = VC/Q
AVC = 10,000/20,000
AVC = 0.5
10,000 20,000
53
12,000
11,000
10,000
?
Calculate for Q =10,000
1.
Variable Cost
2.
Total Cost
3.
Average Variable Cost
4.
Average Total Cost
5.
Fixed Cost.
6.
Average Fixed Cost
10,000 20,000
54
12,000
ATC = TC/Q
ATC = 11,000/10,000
ATC = 1.1
11,000
10,000
FC = 2,000
AVC = VC/Q
AVC = 9,000/10,000
AVC = 0.9
AFC = FC/Q
AFC = 2,000/10,000
AFC = 0.2
?
VC = 9,000
TC = 11,000
10,000 20,000
55