Reflections on Chapter 13: The Costs of Production

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

At low levels of production, each additional unit produced increases the marginal product so marginal cost declines initially. As output increases, marginal product diminishes since each additional unit of input no longer produces as much additional output which leads to rising marginal costs. 

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

Firms are always trying to maximize profit which is total revenue minus total costs. If marginal costs are rising, then profits are less. So firms are trying to find a way to minimize marginal costs and that could mean decreasing production or increasing it.

3. How can you apply these cost concepts to your own life?

The "marginal" concept has been a tough one to grasp - ever since learning that "rational people think at the margins". But I think I finally understand. Last night I was eating dinner with some friends at a Mexican restaurant. I'd had two margaritas and when the waiter came by and asked if I wanted another, I thought about the "marginal" concept. My total margarita consumption was not as important as was the idea of adding one more margarita, the marginal one. I was feeling good and having fun, like my marginal experience was rising but I knew that if I increased my input by one unit (drinking one more marg), my output (fun experience) would not be increased as much as it had been from the unit before (diminishing marginal product) and that my marginal cost (headache in the morning) would increase. I decided to not increase input.