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Understanding Costs on Parade: Total, Average, Marginal

Learn about the various costs associated with production, including average cost, profit margin, and marginal cost calculations. Discover how to determine efficient scale and observe the impact of fixed costs on a firm's output. Explore economies of scale and the concept of natural monopoly in the market.

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Understanding Costs on Parade: Total, Average, Marginal

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  1. Costs on Parade: Total, Average, Marginal • Average cost for a single product: AC(x) = TC(x) / x Profit margin: Π (x) = TR(x) – TC(x) = x P(x) – x AC(x) Π (x) = x [P(x) – AC(x)]

  2. Costs on Parade • Marginal and average cost: AC(x) = TC(x) / x Let AC’ = dAC(x)/dx. Then AC’ = (1/x) dTC/dx – (TC/x2) = MC/x – (1/x)(TC/x) AC’ = [MC – AC] / x • If MC > AC, AC increases • If MC < AC, AC decreases If MC = AC, AC is @ minimum (Efficient Scale) Also note MC = x AC’ + AC = AC + x {Slope of AC curve}

  3. Costs on Parade: Some Observations Reaching Efficient Scale: • When fixed costs are high relative to market size, a firm’s output may not reach efficient scale • Firm enjoys economies of scale over all reasonable levels of output • A single large firm can undercut small firms “Natural monopoly”

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