Blog 4

Hello Class!

My name is Professor Ceccarelli and I am your substitute for Professor Little. She is out rock climbing for the rest of the school year.

Today I am going to discuss how to calculate average cost.

To begin explaining the concept, we must first understand why the AC is important. Companies plan the amount they are going to produce by  fishing equilibrium between the marginal cost and marginal revenue. This way, they can calculate how to maximize profits. As the same time however, the average cost of production is vital because it tell the board if profits will be positive or negative.

The formula for AC is: a(q)= c(q)/q, where c(q) is the cost function and where q is the quantity.
Below you can see a visual to further understand what this looks like.

 Here is a worked example from my notes prepared for this class session:
c(q)=(0.01q^3)-(0.6q^2)+(13q)+1000
The function above is the cost of production cost of Under Armour running shoes.
 If you wanted to find out the avergae ocst of the shoes, you would make q=100 to find the cost.
c(100)=(0.01(100)^3)-(0.6(100)^2)+(13(100))+1000
c(100)=$6300

Now you would plug the values into the average cost formula.
      a(100)= c(100)/100
=> a(100)= 6300/100
=> a(100)= $63 per pair of shoes
That is the average cost of producing one pair of shoes.

Finally, to prepare you for the next lesson, here is what you need to know as for the relationship between marginal cost and average cost:
If MC<AC, the increasing production decreases average cost
If MC>AC, the increasing production increases average cost

Great job today class! See you next time!