Module 6: Production Costs and Perfect Competition

Why this module matters

It helps learners connect Module 6: Production Costs and Perfect Competition to the broader course path in Principles of Microeconomics — Part 4: Production Costs & Perfect Competition. Learners build working familiarity with Fixed cost (FC), Variable cost (VC), and Total cost (TC). The lessons stay grounded in concrete examples and explanations tied to this module's core topics. Learners can check understanding thr….

What this module covers

• Fixed cost (FC)
• Variable cost (VC)
• Total cost (TC)
• Because of all these factors, firms in perfect competition are called "price-takers." The price is determined by demand and supply in the market.
• Next we look at the choices of firms in our first market structure, which is perfect competition.
• Define and calculate costs faced by the firm.

Topical takeaways

• Because of all these factors, firms in perfect competition are called "price-takers." The price is determined by demand and supply in the market.
• Next we look at the choices of firms in our first market structure, which is perfect competition.
• In markets in which not all the conditions for perfect competition are met, the extreme textbook version of perfect competition still helps us understand firm behavior.
• So this is total product, or output, and we can calculate average product, so average product is the total product divided by the quantity of labor.
• So they're still increasing output, output is still going up, but by less and less and less.
• And I'm going to illustrate that with an example from sports, and that is the career of hockey player Mario Lemieux.

Lesson arc

1. Module 6 Overview: Production Costs and Perfect Competition (10 min)

   Because of all these factors, firms in perfect competition are called "price-takers." The price is determined by demand and supply in the market.

   • Because of all these factors, firms in perfect competition are called "price-takers." The price is determined by demand and supply in the market.
   • Next we look at the choices of firms in our first market structure, which is perfect competition.
   • In markets in which not all the conditions for perfect competition are met, the extreme textbook version of perfect competition still helps us understand firm behavior.
2. Video 1: How the different types of output relate with this spreadsheet (8 min)

   So this is total product, or output, and we can calculate average product, so average product is the total product divided by the quantity of labor.

   • So this is total product, or output, and we can calculate average product, so average product is the total product divided by the quantity of labor.
   • So they're still increasing output, output is still going up, but by less and less and less.
   • And I'm going to illustrate that with an example from sports, and that is the career of hockey player Mario Lemieux.
3. Video 2: In this video we'll see how the production function translates into (6 min)

   Marginal cost is falling and then rising, so when we have diminishing, when we're increasing marginal returns, when marginal product is increasing, marginal costs are falling.

   • Marginal cost is falling and then rising, so when we have diminishing, when we're increasing marginal returns, when marginal product is increasing, marginal costs are falling.
   • So these are it's the same example with a factory making sweaters, the one machine, the workers varying from zero to five, and these are the output numbers.
   • So variable inputs are the things that can increase and decrease, and when there's zero, there's zero, there's no cost there, there's no variable output.
4. Video 3: Sometimes when we're working with costs, we have a table like what we (4 min)

   When marginal cost is below average cost, average cost is falling.

   • When marginal cost is below average cost, average cost is falling.
   • And when marginal cost is above average cost, average cost is rising.
   • And now just when it crosses there, now our difference is greater than average cost, so average cost is gonna start to rise.
5. Video 4: let's go over this worksheet (5 min)

   Okay, so anytime that average total cost is falling, that's because marginal cost is below it.

   • Okay, so anytime that average total cost is falling, that's because marginal cost is below it.
   • Marginal cost is change in total cost as we increase output by one, so our marginal cost went up by ten and then by six, eight and 12.
   • Average fixed cost is total fixed cost divided by quantity so it's ten, five, three and a third, four and a half, and two.
6. Video 5: - Here's a worksheet that we will use to figure out profit (8 min)

   Here's a worksheet that we will use to figure out profit This lesson is a transcript of Professor Sara Solnick's , Video 5 lecture.

   • Here's a worksheet that we will use to figure out profit This lesson is a transcript of Professor Sara Solnick's , Video 5 lecture.
   • Lecture Transcript Here's a worksheet that we will use to figure out profit maximization and our example is this Louisville Slugger factory where they're making bats.
   • To maximize profit, we want to choose the point where the profit is the highest and that is right here.
7. Video 8: The top part of this, is just, another little workout with costs (6 min)

   The top part of this, is just, another little workout with costs.

   • The top part of this, is just, another little workout with costs.
   • Lecture Transcript The top part of this, is just, another little workout with costs.
   • So this is just a little exercise to take us through and see that correspondence between the marginal cost curve and the supply curve.
8. Video 9: Here's our worksheet with some practice problems on the short run (5 min)

   If we increase output, well, that is the profit maximizing point, when a marginal cost equals to the price.

   • If we increase output, well, that is the profit maximizing point, when a marginal cost equals to the price.
   • In this graph, demand curve D, okay so the price is up here at three dollars.
   • Minor stylistic cleanup (narrator tags, cue numbers) applied by Qualora; the underlying text is verbatim from Professor Solnick's lecture.
9. Video 10: the last topic in our unit is to look a little bit at the long run (6 min)

   Lecture Transcript Okay, the last topic in our unit is to look a little bit at the long run, and to do that, I'm gonna draw these graphs.

   • Lecture Transcript Okay, the last topic in our unit is to look a little bit at the long run, and to do that, I'm gonna draw these graphs.
   • Video 10: the last topic in our unit is to look a little bit at the long run.
   • Now, an alternative scenario is when the price starts out kinda low.

Key concepts

• Fixed cost (FC)
• Variable cost (VC)
• Total cost (TC)
• Marginal cost (MC)
• Average total cost (ATC)
• Perfect competition
• Price-taker

Practice and assessment

Learners reinforce this module through 20 quiz questions and a supporting glossary covering 7 key terms, with practice centered on Because of all these factors, firms in perfect competition are called "price-takers." The price is determined by demand and supp….

Concept glossary

Fixed cost (FC)

A cost that does not vary with output in the short run (e.g., rent, property taxes).

Variable cost (VC)

A cost that changes with output (e.g., wages, raw materials).

Total cost (TC)

The sum of fixed cost and variable cost: TC = FC + VC.

Marginal cost (MC)

The change in total cost from producing one additional unit of output.

Average total cost (ATC)

Total cost divided by quantity of output: ATC = TC/Q.

Perfect competition

A market with many small firms, a homogeneous product, free entry and exit, and perfect information.

Price-taker

A firm that cannot influence the market price and accepts it as given.

Continue to the full course

Principles of Microeconomics — Part 4: Production Costs & Perfect Competition is the parent course for this module. Use the full course page for pricing, certificate details, and the full curriculum.