Marginal revenue and marginal cost | Microeconomics | Khan Academy

Summary

This script explores the optimal quantity of orange juice to produce given a market price of 50 cents per gallon. As price takers, producers aim to maximize revenue while spreading fixed costs. The discussion highlights the importance of balancing marginal revenue and marginal cost, concluding that producing 9,000 gallons at a profit of 2 cents per gallon is rational. The script challenges viewers to consider production strategies if market prices fall below average total costs.

Takeaways

• 🍊 The market price for orange juice is set at 50 cents per gallon, and producers are price takers.
• 💰 The marginal revenue for each gallon of orange juice produced is constant at 50 cents.
• 📈 The marginal revenue curve is flat at 50 cents per gallon, indicating no change in revenue per additional gallon produced.
• 💹 The goal is to produce as much orange juice as possible to spread fixed costs over a larger quantity.
• 💵 Fixed costs amount to $1000, regardless of production quantity.
• 📉 Average fixed cost decreases as production quantity increases.
• 📊 The marginal cost curve starts to rise after a certain point, indicating increasing costs for additional units.
• 🚫 Producers should not produce beyond the point where marginal cost exceeds marginal revenue to avoid losses.
• 🔍 The rational quantity to produce is where marginal revenue equals marginal cost, which is 9000 gallons in this case.
• 💲 Total revenue is calculated as the market price per gallon times the quantity produced.
• 📊 Average total cost is 48 cents per gallon, leading to a profit of 2 cents per gallon when sold at 50 cents per gallon.
• 🤔 The script concludes with a question about whether to produce at all if the market price is below average total cost.

Q & A

What is the market price of orange juice in the given example?

The market price of orange juice is 50 cents per gallon.

Why are the producers considered price takers?

The producers are considered price takers because there are many producers in the market, so they have to accept the market price and cannot influence it.

What is the marginal revenue for each gallon of orange juice produced?

The marginal revenue for each gallon of orange juice produced is 50 cents, as the price is fixed at 50 cents per gallon.

How does the marginal revenue curve look like in this scenario?

The marginal revenue curve is flat at 50 cents per gallon, as the revenue for each additional gallon produced remains constant.

What are the two dynamics that influence the quantity of orange juice a producer wants to produce?

The two dynamics are: 1) The desire to produce as much as possible to spread fixed costs over more gallons, and 2) The need to generate as much revenue as possible to cover fixed costs.

What is the significance of the 'little dip' in the marginal cost curve?

The 'little dip' in the marginal cost curve represents the point at which the marginal cost starts to increase as production increases, indicating that producing beyond this point would lead to higher costs per additional unit.

Why shouldn't the producer produce when the marginal cost is higher than the marginal revenue?

Producing when the marginal cost is higher than the marginal revenue would result in a loss for each additional unit produced, as the cost to produce that unit exceeds the revenue gained from selling it.

What is the rational quantity of orange juice to produce according to the script?

The rational quantity of orange juice to produce is 9000 gallons, where marginal revenue equals marginal cost.

How is the total revenue calculated in this scenario?

The total revenue is calculated by multiplying the market price per gallon (50 cents) by the quantity of gallons produced (9000 gallons).

What is the average total cost per unit of orange juice produced?

The average total cost per unit of orange juice produced is 48 cents.

What is the profit per unit of orange juice produced, and how is it calculated?

The profit per unit of orange juice produced is 2 cents, calculated by subtracting the average total cost (48 cents) from the market price (50 cents).

What is the total profit if the producer sells 9000 units at a profit of 2 cents per unit?

The total profit is 180 dollars, calculated by multiplying the profit per unit (2 cents) by the quantity produced (9000 units).

What is the question posed at the end of the script regarding the market price and production quantity?

The question is whether it makes sense to sell units at all if the market price is lower than the average total cost, and if so, how many units should be produced.