Marginal cost and revenue

What are the 4 main short run cost curves to understand?

• Marginal cost (MC)

• Average fixed cost (AFC)

• Average variable cost (AVC)

• Average (total) cost (AC)

What is the Marginal cost (MC)?

• change in total production cost comes from producing one additional unit

What are the short run cost calculations?

Work this out

Average and marginal cost diagram

Show average variable cost diagram

Show Average Variable cost diagram, showing a rise in fixed cost

Show Average Variable cost diagram, showing a rise in variable cost

What’s marginal revenue?

• additional revenue that comes from the sale of one additional unit.

• 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒/𝑜𝑢𝑡𝑝𝑢𝑡

• 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = ∆ 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒/∆ 𝑜𝑢𝑡𝑝𝑢𝑡

Where are revenues maximised?

• at an output level where 𝑀𝑅 = 0, that is, there is no change in total revenue for selling an extra unit.

• In a monopolistic market if increasing quantity decreases price, then it stands to reason that marginal revenue will fall as quantity increases.

Work this out:

Show the calculations on a graph, what does it illustrate?