Chapter 13 Reflections- The Costs of Production

The Cost of Production

Why do marginal costs first fall and then begin to rise?

They first fall because people learn to do their jobs better as they produce more. Marginal cost indicates "total cost changes for a given change in quantity of output," as amosweb.com puts it. In layman's terms this just means that at first there is always a learning curve. People just learning their jobs are not as efficient, they have to take the time to learn the new way of producing the good. Once they understand how the good needs to be produced they go about their job automatically without having to relearn the whole process over again, it become second nature and they are more efficient.

Think about Henry Ford when he was just starting to role the first cars out from production. It was very expensive and time consuming to do one car at a time. Over time Ford developed a faster, more efficient way of producing cars and getting them out from the factory and onto the roads. He went from having just a few workers to having hundred's and thousands of workers. His assembly line revolutionized the way goods were produced. 

Why are marginal costs important to a firm when making decisions to increase or decrease production?

Marginal costs are important to a firm when making decisions to increase or decrease production because 
as Chapter 13 points out on page 270, "Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising." A firm must take into account how well a good is selling, the demand for the product, and it's cost effectiveness. 

What immediately comes to mind for me is Apple. Apple worked really hard to put out the very first personal tablet computer called the iPad in 2010. It had all the bells and whistles and it's portability and sleek design made it a very desirable product. The consumer was already familiar with the iPod so there wasn't a need to educate the consumer totally on how to use the product. The price depended on how much memory you wanted in your iPad. The least expensive was the 16 GB, then the 32 GB and lastly the 64 GB. Over 15 million 1st generation iPads were sold. I think that with each generation of iPad Apple has to weigh the demand for the new product (how many people already have an iPad) and how much can the consumer afford to pay (Apple created the iPad mini, virtually the same product as the original iPad just a smaller, less expensive version).   


Personally I am not one of those people that has to have the newest, flashiest, anything. I will usually wait until the hype dies down and the price goes down. I have plenty of friends who will rush right out to the store and spend ridiculous amounts of money to have the newest product. That's fine for them, but as for me and my house, we will wait for the sale!