Reading: Marginal Cost
Business and Economics Terms
Suppose you are producing and selling some item. The profit you make is the amount of money you take in minus what you have to pay to produce the items. Both of these quantities depend on how many you make and sell. (So we have functions here.) Here is a list of definitions for some of the terminology, together with their meaning in algebraic terms and in graphical terms.- Your cost is the money you have to spend to produce your items.
- The Fixed Cost (FC) is the amount of money you have to spend regardless of how many items you produce. FC can include things like rent, purchase costs of machinery, and salaries for office staff. You have to pay the fixed costs even if you don’t produce anything.
- The Total Variable Cost (TVC) for q items is the amount of money you spend to actually produce them. TVC includes things like the materials you use, the electricity to run the machinery, gasoline for your delivery vans, maybe the wages of your production workers. These costs will vary according to how many items you produce.
- The Total Cost (TC) for q items is the total cost of producing them. It’s the sum of the fixed cost and the total variable cost for producing q items.
- The Average Cost (AC) for q items is the total cost divided by q, or TC/q. You can also talk about the average fixed cost, FC/q, or the average variable cost, TVC/q.
- The Marginal Cost (MC) at q items is the cost of producing the next item. Really, it’s MC(q) = TC(q + 1) – TC(q). In many cases, though, it’s easier to approximate this difference using calculus (see Example below). And some sources define the marginal cost directly as the derivative, MC(q) = TC′(q). In this course, we will use both of these definitions as if they were interchangeable.
- Demand is the functional relationship between the price p and the quantity q that can be sold (that is demanded). Depending on your situation, you might think of p as a function of q, or of q as a function of p.
- Your revenue is the amount of money you actually take in from selling your products. Revenue is price × quantity.
- The Total Revenue (TR) for q items is the total amount of money you take in for selling q items.
- The Average Revenue (AR) for q items is the total revenue divided by q, or TR/q.
- The Profit (π) for q items is TR(q) – TC(q).
- The average profit for q items is π/q. The marginal profit at q items is π(q + 1) – π(q), or π′(q)