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Marginal Cost
So I’m having a hard time grasping this concept I think. So if I now have capital and produce whatever it is I’m producing, I am now doing it at a lower marginal cost than before I had the capital. Is this because I spend less time per unit?
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12 Replies
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I think decreasing marginal cost applies when with the (new) capital you invest in new technology and/ or new knowledge of the human factor (abilities); if you only expand the production using same technology & human you don’t have decrease marginal cost and instead, you can have “increased” m.c. because you add more complexity needing more layers of management & control
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Sorry for the late reply, I barely even saw your message. Thank you for a response and explanation! I understand it now with your words. Basically its a decrease if I invest in new, and an increase if I stay with the same?
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If you continue producing “K” ouput with the same “X” input as before you don’t have dmc; with the same “X” input you must now produce “K+n” output to have dmc
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This reply was modified 1 year, 10 months ago by Francisco.
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So I have to produce what I usually produce plus something new
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Exactly; also you can produce the same output, but wit new qualities (realy you are not producing the “same”output, but another one, diferenciating from competition), etc.
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Like instead of crafting just a mallet, I now put spikes on it
But also if I craft a mallet and a sword? Would both of these examples qualify or just the former?
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For DMC the important thing is that the TC/Q ratio becomes smaller as time goes by (CT= Total Cost & Q= Quantity produced)
There are several hypotheses (almost infite); few examples:
1- With the new Capital you buy more advanced machines and produce more outputs (with the same inputs: raw material input, human work, energy, etc.);
– In same cases this can also be achieved with organizational studies of efficiency and better training of its workers that allows optimizing the Processes;
2- With the new Capital you offer a new service without more inputs (eg airlines offering VIP lounges to more customers);
3- etc., etc., etc.
Don’t confuse with increasing marginal profitability, an example:
– With the
new Capital, it starts a new (strategic) marketing campaign and differentiates
its product from the competition (eg Coca Cola, Apple), and this allows you to increase the price of the same product.These subjects are studied in Microeconomics and what I wrote are simplifications of reality;
What is important: to have DMC the TC/Q ratio must become smaller as time goes by
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Your examples made it a lot more clear🙏🏾. “Increase the price of the same product.” Producing more outputs with the same inputs
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This reply was modified 1 year, 10 months ago by
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I’m not sure if I understood the question but d*mn that’s a nice answer. 😁
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Haha no problem!
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I think you are right. If you were a fisherman who fished with his hands you catch X fish per week. If you invest in a fishing pole (capital), you catch x + y fish per week. So the cost in terms of time per fish has gone down.
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Nice! I like this breakdown!
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