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Costs on Parade: Total, Average, Marginal

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)]. Costs on Parade. Marginal and average cost: AC(x) = TC(x) / x Let AC’ = dAC(x)/dx . Then

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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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