Average costs (ATC, MC) and marginal revenue (MR)
Marginal Revenue and Marginal Cost Thinking about a rational quantity of juice to produce
⇐ Use this menu to view and help create subtitles for this video in many different languages.
You'll probably want to hide YouTube's captions if using these subtitles.
- Let's continue with our
- orange juice producing example
- In this situation I want to think about
- what a rational quantity of orange juice might be
- what would be a rational quantity
- of orange juice to produce
- given a market price
- So let's say that
- the market price right now is
- 50 cents a gallon
- and I'm going to assume that
- there are many producers here
- so we're going to have to be price takers
- and obviously we want to charge
- as much as we can per gallon
- but if we charge even a penny
- over 50 cents a gallon
- then people are going to buy
- all of their orange juice
- from other people
- so this is the price that we can charge
- 50 cents per gallon
- So, if we think about it
- in terms of marginal revenue
- per incremental gallon
- well that first incremental gallon
- we're going to get 50 cents
- the next incremental gallon
- we're going to get 50 cents for that one
- and the next one
- we're going to get 50 cents as well.
- for the first thousand gallons
- we're going to get 50 cents
- for each of those gallons
- for the first 10 thousand gallons
- we'll get 50 cents per gallon
- So, our marginal revenue curve
- will look something like this
- Our marginal revenue is a flat curve
- right at 50 cents a gallon
- so that is our marginal revenue
- at 50 cents
- at a market price of 50 cents per gallon
- now in this situation
- what's a reasonable quantity
- that we would want to produce?
- Now there's two dynamics here
- we want to produce as much as possible
- so that we can spread our fixed cost
- over those gallons
- that's one way of thinking about it
- or, another way of thinking about it is
- we have a certain amount of fixed cost
- we are spending $1000 no matter what
- so why don't we try to get
- as much revenue as possible
- to try to make up for those fixed costs
- or if we think about it
- in terms of average fixed cost
- the more quantity that we produce
- the component of the cost for that
- from the fixed cost
- goes down and down and down
- so we want to have as much as possible
- to spread our fixed costs
- now the one thing that we do need to think about is
- especially once we kind of get beyond the little dip
- in the marginal cost curve
- and as we produce more and more units
- the marginal cost is going up higher and higher and higher
- we don't want to produce so much
- that the cost of producing that incremental unit
- the marginal cost of that incremental unit
- is more than the marginal cost of that actual
- or the marginal cost of that incremental unit
- is not higher than the marginal revenue
- that we're getting on that incremental unit
- so, until marginal revenue is equal to marginal cost
- or another way to think about it
- you don't want marginal cost
- and this is after we go to this little dip here
- we're trying to do as much as possible
- marginal cost is going higher and higher and higher
- we don't want to produce this much right over here
- because here the cost for that extra gallon is higher
- than what we're going to get for that extra gallon
- looks like that cost for that extra gallon
- might be 53 cents
- while we're only gonna get 50 cents
- for that extra gallon
- so every extra gallon we produce over here
- we're going to be losing money
- so you don't want marginal cost
- to be greater than marginal revenue
- so when you look at the curves like this
- and make sense to just say
- when does marginal revenue equal marginal cost?
- and that's this point right over here
- and that is the rational amount to produce
- so that is 9000 units
- so we're going to be at this line over here
- we're gonna produce 9000 gallons of juice
- our revenue that we're going to get
- is going to be the rectangle of the area
- that is high as the price we're getting per unit
- times the number of units
- so this is gonna be the total revenue we get
- if we were to shade this in
- I'm not gonna shade this in
- because it's going to make my whole diagram messy
- and what's our total cost?
- well, we have our average total cost right here
- this is our average total cost at 48 cents
- that's the little green triangle here
- so it's 48 cents per unit
- times the total number of units
- our cost, the area in this rectangle
- so if I were to shade this in
- this little slightly smaller rectangle
- and so our profits are the difference between the two
- our total revenue is the area under the rectangle
- that has this marginal revenue line as its upper bound
- and our cost is the rectangle
- that has our average total cost
- this line right over here
- as its upper bound
- so our profits in this circumstance
- are going to be the area right over here
- the height is the difference between our marginal cost
- which is the same as our marginal revenue
- and our total cost
- so the heigh is going to be
- this two cents right over here
- we're taking the difference of 50 and 48
- so it's gonna be 2 cents
- and then, the quantity produced
- is going to be 9000 units
- so 9000
- we're making 2 cents per unit
- remember, our average cost
- our average total cost is 48 cents per unit
- we're selling that 50 cents per unit
- so we're making 2 cents per unit
- that's not 20
- we're making 2 cents per unit
- 2 cents times 9000 units gives us
- that's 18000 cents, or 180 dollars of profit
- now what I want you to think about
- and we'll answer this in the next video
- is does it make sense to sell units at all
- and if so, how many units should we sell
- if, and here is the question
- if the market price is lower
- than your average total cost
- so does it make sense
- and how many units does it make sense to produce
- let's say if the market price were 45 cents per unit
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
|
Have something that's not a question about this content? |
This discussion area is not meant for answering homework questions.
Discuss the site
For general discussions about Khan Academy, visit our Reddit discussion page.
Flag inappropriate posts
Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.
abuse
- disrespectful or offensive
- an advertisement
not helpful
- low quality
- not about the video topic
- soliciting votes or seeking badges
- a homework question
- a duplicate answer
- repeatedly making the same post
wrong category
- a tip or feedback in Questions
- a question in Tips & Feedback
- an answer that should be its own question
about the site
Share a tip
Suggest a fix
Have something that's not a tip or feedback about this content?
This discussion area is not meant for answering homework questions.