Mostly summarized from Gregory Mankiw’s Principles of Economics, 5^th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 13 of 36 – The Costs of Production - section 17 of 23

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Table 2 here

 

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Figure 4-MC here

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Per Figure 4-MC and Table 2

· Conrad's Coffee Shop marginal cost rises with the quantity of output produced

· the cost of producing one more unit than before increases with each additional unit produced

In this case a constant increase of $0.20 for each additional unit, per Table 2 column 8.

This marginal cost increase is because of the property of diminishing marginal product.

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When Conrad produces a small quantity of coffee he has few workers and much of his equipment is not in constant use

Because he can easily put these idle resources into use the marginal cost of an extra cup of coffee is small.

But when Conrad produces a large quantity of coffee his shop is crowded with workers and most of his equipment is constantly in use.

He can produce more coffee by adding workers, but

· these new workers have to work in crowded conditions

· they often have to wait to use the equipment

Therefore, when the quantity of coffee produced is already high the marginal cost of an extra cup of coffee is high.

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Looking at columns 2 and 8, when adding an additional worker

· coffee production is increased from 2 to 3 cups and total cost is increased by $.70

· coffee production is increased from 9 to 10 cups and total cost is increased by $2.10

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