Changes

For now, let’s focus on the “short run.”  The key concepts for the "short run" are “marginal cost” and “marginal revenue.”  How much does it cost to make one more widget, and much revenue does that extra widget generate for the company?  That additional cost per unit is called “marginal cost.”  The additional revenue per unit is called “marginal revenue.”  As we discussed in the last Lecture, as long as marginal revenue is slightly higher than marginal cost, then it makes sense to produce more goods or services (e.g., produce that extra widget).  Typically, companies continue making more and more goods until marginal revenue falls below marginal cost, at which time they stop production because they begin to lose money on each additional good they produce.  This is just like our example in our last Lecture where the store owner closes his store at night as soon as the marginal cost of his electricity and employee wages starts the exceed the marginal revenue of new customers coming into the store.

For now, let’s focus on the “short run.”  The key concepts for the "short run" are “marginal cost” and “marginal revenue.”  How much does it cost to make one more widget, and much revenue does that extra widget generate for the company?  That additional cost per unit is called “marginal cost.”  The additional revenue per unit is called “marginal revenue.”  As we discussed in the last Lecture, as long as marginal revenue is slightly higher than marginal cost, then it makes sense to produce more goods or services (e.g., produce that extra widget).  Typically, companies continue making more and more goods until marginal revenue falls below marginal cost, at which time they stop production because they begin to lose money on each additional good they produce.  This is just like our example in our last Lecture where the store owner closes his store at night as soon as the marginal cost of his electricity and employee wages starts the exceed the marginal revenue of new customers coming into the store.

===The Short Run===

===The Short Run: Marginal Product===

Imagine yourself as the President of a company making widgets, our imaginary good.  If it costs you $200 to make 10 widgets and $205 to make 11 widgets, then what is your marginal cost (MC) of the 11th unit?  It is only $5.  What is its average cost?  Nearly $19 ($205 total cost divided by 11 total units).  '''''Average cost is often greater than the marginal cost'''''.  This makes sense, because once you pay for your factory and workers, you do not have much additional cost to produce an extra unit.  This is called '''''economies of scale: the bigger your operation, the cheaper you can make one more unit'''''.

Imagine yourself as the President of a company making widgets, our imaginary good.  If it costs you $200 to make 10 widgets and $205 to make 11 widgets, then what is your marginal cost (MC) of the 11th unit?  It is only $5.  What is its average cost?  Nearly $19 ($205 total cost divided by 11 total units).  '''''Average cost is often greater than the marginal cost'''''.  This makes sense, because once you pay for your factory and workers, you do not have much additional cost to produce an extra unit.  This is called '''''economies of scale: the bigger your operation, the cheaper you can make one more unit'''''.