Maximizing profit with total revenue and total cost

Chapter 8: Production Costs: Where Less Is More

The wages paid to labor are typically part of your total variable cost. If your firm wants to increase production, you simply hire more workers, incurring the variable cost of the additional wages. Similarly, if you want to cut back production, you lay off workers, with an associated reduction in wages and total variable cost.

Figure 8-1 illustrates the graphical relationships for total cost, total fixed cost, and total variable cost. As indicated in Figure 8-1, at output qa the total cost is C a and the total fixed cost is TFC a. At the output level qb, total fixed cost is the exact same amount as it was at qa, TFC a .

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Figure 8-1: Total cost curves.

Marginal cost

Marginal cost is the change in total cost that occurs when one additional unit of output is produced.

Marginal cost is often determined by using calculus. To find marginal cost, you simply take the derivative of total cost with respect to the quantity of output produced. For the total cost equation

marginal cost equals