Marginal cost & differential calculus
In economics, the idea of marginal cost can be nicely captured with the derivative. Created by Sal Khan.
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- what is this "margin" Sal talks about?(13 votes)
- The amount that total costs increase per each additional unit of good produced, which is why it changes as you move right on the x-axis.(4 votes)
- How likely is it that something like cost can be modeled fairly accurately by an algebraic function?(6 votes)
- It tends to be fairly likely. Lets say your expenses that need to be covered are: worker payment, product materials, machine time, and building rent.
Worker payment, and building rent are fixed, lets say 2000, for worker payment, and 1000 for building rent.
Lets also say that product materials cost half of the price of the product (25 * the number of products), and that running the machine costs 1/10 the number of products squared (5 * products ^2).
This can be written as:
cost(#products) = 1/10*5(#products)^2 + 1/2*25(#products) + 3000(12 votes)
- can you explain why the cost of production increases as the quantity increases? why is this graph an upward sloping curve?(6 votes)
- Is finding C'(q) or the marginal cost of a such a function used for anything in economics except for finding when to stop producing something?(7 votes)
- its also used to calculate the amount of a certain that is supplied by all firms in the economy at any given price, which is supply. supply can be used to calculate supply curves to construct other economic models, usually a supply and demand model.(4 votes)
- Are there similar videos available for the application of integrals?(4 votes)
- Here are some of the econ videos he eluded to: https://www.khanacademy.org/economics-finance-domain/microeconomics/firm-economic-profit/average-costs-margin-rev/v/marginal-cost-and-average-total-cost(0 votes)
- When we use derivative it provides instantaneous rate of change, suppose we calculate marginal cost using derivatives at quantity 5 it will provide additional cost of very small change(near zero) in quantity ,how can we use that for change in a complete unit? for example can we use it for for estimating complete additional 1 unit of quantity?why?(3 votes)
- It's assuming the rate is not going to drastically change very quickly, of course the more you try and predict ahead the more inaccurate the precition will be from that point. There are actually a few instances of this kind of using the trend to predict things nearby in calculus.(2 votes)
- What if it was Marginal Benefit instead of Marginal Cost?
Is there some rule similar to this for Marginal benefit?(3 votes)
- Does the concepts of calculus change when we encounter complex functions ?(2 votes)
- Then is the cost function the anti-derivative of the marginal cost?(1 vote)
- If the firm is given by AR=20-Q where Q is the output determine the level of output at which this firm 's total revenue will be at a maximum point(1 vote)
Let's say I run some type of a factory, and I've studied my operations. And I'm able to figure out how my cost varies as a function of quantity over a week, on a weekly period. And so to visualize that, let me draw it. I could draw this cost function. So this is my cost axis. This right over here could be my quantity axis. So that's quantity, or q, let me just call that q. That's my q-axis. And my function might look something like this. It seems reasonable to me. Even if I produce nothing, I still have fixed costs. I have to pay rent on the factory. I have to probably pay people even if we produce nothing. And so let's say that fixed costs in the week is $1,000. And then as my quantity increases, so do my costs. So if I produce 100 units right over here, then my cost goes up to $1,300. If I produce more than that, you see my costs increase and they increase at an ever faster rate. Now, I go into a lot more depth on things like cost functions in the Economics playlist, but what I want to think about in the calculus context is what would the derivative of this represent? What would the derivative of c with respect to q, which could also written as c prime of q, what does that represent? Well, if we think about it visually, we know that we can think about the derivative as the slope of the tangent line. So, for example, that's the tangent line when q is equal to 100. So the slope of that tangent line you could view as c prime, or it is c prime of 100. But what is that slope telling us? Well, the slope is the change in our cost divided by the change in our quantity. And it's the slope of the tangent line. This is what we first learned in calculus. As we get to smaller and smaller and smaller changes in quantity, we essentially take the limit as our change in quantity approaches 0. That's how we get that instantaneous change. So one way to think about it is this is the instantaneous. This is the rate right on the margin at which is our cost is changing with respect to quantity. So if I were to produce just another drop, another atom of whatever I'm producing, at what rate is my cost going to increase? And the reason why I'm saying right on the margin is we see that it's not constant. If our cost function were aligned, we would have a constant slope. The tangent line would essentially be the cost function. But we see it changes right over here. The incremental atom to produce here costs less than the incremental atom right over here. The slope has gone up. And it might make sense. Maybe I'm using some raw material out there in the world. And as I use more and more of it, it becomes more and more scarce. And so the market price of it goes up and up and up. But you might say, well, why do I even care about the rate at which my costs are increasing on the margin? Which is why this is called marginal cost. Well, the reason why you care about it is you might be trying to figure out when do I stop producing? Let's say this is orange juice. If I know that next gallon is going to cost me $5 to produce and I can sell it for $6, then I'm going to do it. But if that next gallon, if I'm up here, and I've already produced a lot, and I'm taking all the oranges off the market, and now I have to transport oranges from the other side of the planet or whatever it might be, and now if that incremental gallon of oranges or gallon of orange juice costs me $10 to produce, and I'm not going to be able to sell it for more than $6, it doesn't make sense for me to produce it anymore. So in a calculus context, or you can say in an economics context, if you can model your cost as a function of quantity, the derivative of that is the marginal cost. It's the rate at which costs are increasing for that incremental unit. And there's other similar ideas. If we modeled our profit as a function of quantity, if we took the derivative, that would be our marginal profit. If we modeled revenue, that would be our marginal revenue. How much does a function increase as we increase our input, as we increase our quantity on the margin?