same thing) and dividing it by the change in output, for each possible change in output. Marginal costs are

typically rising. A firm can compare marginal cost to the additional revenue it gains from selling another unit

to find out whether its marginal unit is adding to profit.

We calculate average total cost by taking total cost and dividing by total output at each different level of output.

Average costs are typically U-shaped on a graph. If a firm’s average cost of production is lower than the market

price, a firm will be earning profits.

We calculate average variable cost by taking variable cost and dividing by the total output at each level of

output. Average variable costs are typically U-shaped. If a firm’s average variable cost of production is lower

than the market price, then the firm would be earning profits if fixed costs are left out of the picture.

7.4 Production in the Long Run
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