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Marginal revenue and marginal cost | Microeconomics | Khan Academy - YouTube
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Let's continue with our
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orange juice producing example
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In this situation I want to think about
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what a rational quantity of orange juice might be
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what would be a rational quantity
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of orange juice to produce
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given a market price
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So let's say that
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the market price right now is
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50 cents a gallon
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and I'm going to assume that
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there are many producers here
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so we're going to have to be price takers
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and obviously we want to charge
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as much as we can per gallon
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but if we charge even a penny
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over 50 cents a gallon
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then people are going to buy
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all of their orange juice
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from other people
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so this is the price that we can charge
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50 cents per gallon
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So, if we think about it
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in terms of marginal revenue
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per incremental gallon
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well that first incremental gallon
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we're going to get 50 cents
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the next incremental gallon
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we're going to get 50 cents for that one
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and the next one
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we're going to get 50 cents as well.
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for the first thousand gallons
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we're going to get 50 cents
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for each of those gallons
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for the first 10 thousand gallons
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we'll get 50 cents per gallon
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So, our marginal revenue curve
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will look something like this
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Our marginal revenue is a flat curve
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right at 50 cents a gallon
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so that is our marginal revenue
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at 50 cents
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at a market price of 50 cents per gallon
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now in this situation
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what's a reasonable quantity
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that we would want to produce?
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Now there's two dynamics here
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we want to produce as much as possible
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so that we can spread our fixed cost
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over those gallons
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that's one way of thinking about it
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or, another way of thinking about it is
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we have a certain amount of fixed cost
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we are spending $1000 no matter what
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so why don't we try to get
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as much revenue as possible
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to try to make up for those fixed costs
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or if we think about it
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in terms of average fixed cost
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the more quantity that we produce
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the component of the cost for that
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from the fixed cost
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goes down and down and down
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so we want to have as much as possible
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to spread our fixed costs
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now the one thing that we do need to think about is
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especially once we kind of get beyond the little dip
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in the marginal cost curve
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and as we produce more and more units
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the marginal cost is going up higher and higher and higher
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we don't want to produce so much
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that the cost of producing that incremental unit
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the marginal cost of that incremental unit
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is more than the marginal cost of that actual
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or the marginal cost of that incremental unit
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is not higher than the marginal revenue
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that we're getting on that incremental unit
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so, until marginal revenue is equal to marginal cost
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or another way to think about it
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you don't want marginal cost
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and this is after we go to this little dip here
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we're trying to do as much as possible
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marginal cost is going higher and higher and higher
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we don't want to produce this much right over here
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because here the cost for that extra gallon is higher
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than what we're going to get for that extra gallon
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looks like that cost for that extra gallon
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might be 53 cents
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while we're only gonna get 50 cents
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for that extra gallon
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so every extra gallon we produce over here
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we're going to be losing money
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so you don't want marginal cost
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to be greater than marginal revenue
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so when you look at the curves like this
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and make sense to just say
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when does marginal revenue equal marginal cost?
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and that's this point right over here
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and that is the rational amount to produce
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so that is 9000 units
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so we're going to be at this line over here
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we're gonna produce 9000 gallons of juice
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our revenue that we're going to get
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is going to be the rectangle of the area
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that is high as the price we're getting per unit
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times the number of units
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so this is gonna be the total revenue we get
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if we were to shade this in
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I'm not gonna shade this in
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because it's going to make my whole diagram messy
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and what's our total cost?
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well, we have our average total cost right here
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this is our average total cost at 48 cents
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that's the little green triangle here
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so it's 48 cents per unit
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times the total number of units
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our cost, the area in this rectangle
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so if I were to shade this in
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this little slightly smaller rectangle
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and so our profits are the difference between the two
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our total revenue is the area under the rectangle
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that has this marginal revenue line as its upper bound
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and our cost is the rectangle
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that has our average total cost
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this line right over here
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as its upper bound
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so our profits in this circumstance
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are going to be the area right over here
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the height is the difference between our marginal cost
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which is the same as our marginal revenue
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and our total cost
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so the heigh is going to be
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this two cents right over here
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we're taking the difference of 50 and 48
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so it's gonna be 2 cents
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and then, the quantity produced
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is going to be 9000 units
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so 9000
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we're making 2 cents per unit
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remember, our average cost
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our average total cost is 48 cents per unit
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we're selling that 50 cents per unit
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so we're making 2 cents per unit
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that's not 20
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we're making 2 cents per unit
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2 cents times 9000 units gives us
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that's 18000 cents, or 180 dollars of profit
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now what I want you to think about
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and we'll answer this in the next video
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is does it make sense to sell units at all
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and if so, how many units should we sell
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if, and here is the question
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if the market price is lower
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than your average total cost
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so does it make sense
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and how many units does it make sense to produce
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let's say if the market price were 45 cents per unit
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does it make sense for us to produce
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