Examples of Marginal Cost of Capital in the following topics:
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- The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
- The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
- Generally we see that as more capital is raised, the marginal cost of capital rises .
- This happens due to the fact that marginal cost of capital generally is the weighted average of the cost of raising the last dollar of capital.
- The Marginal Cost of Capital is the cost of the last dollar of capital raised.
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- The marginal decision rule says that a firm will shift spending among factors of production as long as the marginal benefit of such a shift exceeds the marginal cost.
- The cost of that action will be the output lost from cutting back on capital, which is the ratio of the marginal product of capital (MPK) to the price of capital (the rental rate, PK).
- Thus, the cost of cutting back on capital is MPK/PK.
- If the marginal benefit of additional labor, MPL/PL, exceeds the marginal cost, MPK/PK, then the firm will be better off by spending more on labor and less on capital.
- Employ the marginal decision rule to determine the equilibrium cost of labor
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- Firms add capital to the point where the value of marginal product of capital is equal to the rental rate of capital.
- Firms may buy, rent, or lease infrastructure and tools in the capital market, but even if the firm owns these factors of production, the opportunity cost of using this capital is the foregone rent that the firm could receive if it rented the capital to somebody else rather than using it for production.
- It can be used to derive the marginal product for capital, which is the increase in the amount of output from an additional unit of capital.
- The value of marginal product (VMP) of capital is the marginal product of capital multiplied by price.
- Firms will increase the quantity of capital hired to the point where the value of marginal product of capital is equal to the rental rate of capital.
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- Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced.
- Marginal cost includes all of the costs that vary with the level of production.
- The amount of marginal cost varies according to the volume of the good being produced.
- An example of calculating marginal cost is: the production of one pair of shoes is $30.
- The marginal cost of producing the second pair of shoes is $10.
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- The cost of labor to a firm is called the wage rate.
- This can be thought of as the firm's marginal cost.
- The amount a factor adds to a firm's total cost per period is the marginal cost of that factor, so in this case the marginal cost of labor is $10.
- Firms maximize profit when marginal costs equal marginal revenues, and in the labor market this means that firms will hire more employees until the wage rate (marginal cost of labor) equals the MRPL.
- For example, is capital becomes more expensive relative to labor, the demand for labor will increase as firms seek to substitute labor for capital.
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- In economics, a cost curve is a graph that shows the costs of production as a function of total quantity produced.
- The various types of cost curves include total, average, marginal curves.
- The marginal revenue-marginal cost perspective relies on the understanding that for each unit sold, the marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).
- If the marginal revenue is greater than the marginal cost, then the marginal profit is positive and a greater quantity of the good should be produced.
- Likewise, if the marginal revenue is less than the marginal cost, the marginal profit is negative and a lesser quantity of the good should be produced .
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- It is the cost of producing one more unit of a good.
- For example, if producing one more car requires the building of an additional factory, the marginal cost of producing the additional car includes all of the costs associated with building the new factory.
- An example of marginal cost is evident when the cost of making one pair of shoes is $30.
- The cost of making two pairs of shoes is $40.
- Therefore the marginal cost of the second shoe is $40 -$30=$10.
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- This increase in the marginal cost of output as production increases can be graphed as the marginal cost curve, with quantity of output on the x axis and marginal cost on the y axis.
- In the short run, a firm has a set amount of capital and can only increase or decrease production by hiring more or less labor.
- The fixed costs of capital are high, but the variable costs of labor are low, so costs increase more slowly than output as production increases.
- As long as the marginal cost of production is lower than the average total cost of production, the average cost is decreasing.
- However, as marginal costs increase due to the law of diminishing returns, the marginal cost of production will eventually be higher than the average total cost and the average cost will begin to increase.
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- Variable costs change according to the quantity of goods produced; fixed costs are independent of the quantity of goods being produced.
- It consists of variable costs and fixed costs.
- Total cost is the total opportunity cost of each factor of production as part of its fixed or variable costs .
- Variable costs are also the sum of marginal costs over all of the units produced (referred to as normal costs).
- They include inputs (capital) that cannot be adjusted in the short term, such as buildings and machinery.
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- To find the profit maximizing point, firms look at marginal revenue (MR) - the total additional revenue from selling one additional unit of output - and the marginal cost (MC) - the total additional cost of producing one additional unit of output.
- When the marginal revenue of selling a good is greater than the marginal cost of producing it, firms are making a profit on that product.
- This leads directly into the marginal decision rule, which dictates that a given good should continue to be produced if the marginal revenue of one unit is greater than its marginal cost.
- Most will have low marginal costs at low levels of production, reflecting the fact that firms can take advantage of efficiency opportunities as they begin to grow.
- This trend is reflected in the upward-sloping portion of the marginal cost curve.