In the last video we finished up asking ourselves

how much do we produce

if the market price is at 45 cents

and just going with the logic

that we introduced in the last video

you want to produce as much as possible

to spread out the fixed costs

but you don't want to produce so much

that the marginal cost is higher

than your marginal revenue

and your marginal revenue is your market price

every unit, every incremental unit

you're going to get 45 cents

So you wanna look at the quantity

where your marginal revenue, the 45 cents

is equal to your marginal cost

and you can look at it over here

so, if you look at our marginal revenue

so, let's say 45 cents is right over there

you wanna look

where the 45 cents is equal to your marginal costs

It looks like it is right over there.

You can even see it in our table

When does our marginal cost equal 45 cents?

It equals that

when we produce 8,000 gallons of our juice

Now, the reason why this is somewhat interesting

is that at that point

the amount of revenue that we're getting per unit

our marginal revenue

is less than our total cost per unit

We're selling each unit at 45 cents

but our total cost for each of those units

is 48 cents, on average

So this right over here is our total cost

So you might say

look! I'm making a loss on every unit!

The total amount of revenue I'm getting

is a smaller rectangle over here

It's the quantity times the marginal revenue per unit

so, this is the amount of revenue that I'm getting

let me colour it in carefully

That is the amount of revenue that I'm getting

while my costs are this larger rectangle

My quantity times my average total cost per unit.

and so, what I end up with

is if you take that revenue

and you subtract that quantity

you end up with a loss of exactly this much

you're operating in this situation at a loss

when you are producing 8,000 units

and you're getting 45 cents per unit

So, does it make sense for you to do this?

And we can even figure out the loss

You're producing 8,000 units

and you're selling them for 45 cents a unit

and it costs you 48 cents per unit to produce them

on average

when you put all the costs in

48 cents per unit

So you're losing 3 cents per unit

per, I guess, gallon

we're talking about orange juice here

times 8,000 gallons

means that we are losing 240 dollars

8,000 times 3 cents is 24,000 cents

which is the same thing as 240 dollars

so, does it make sense for us to do this?

Well, one way to think about it

let's say we didn't do it

Let's say we're just like

hey, I'm not going to produce any gallons

well, then what's going to be our loss?

Well, we're assuming that this is our fixed cost

we've already committed ourselves

to this expenditure right over here

Whether we produce no drops of orange juice

we are still going to be spending 1,000 dollars

So we if produce nothing

we are garuanteeing ourselves

a weekly loss of 1,000 dollars

And this is at least better than that

So by starting to produce some units

we are at least able to offset some of that loss

and we're spreading out that fixed cost

over more and more and more gallons

And you might say

hey! Why don't I just produce more and more units?

Why don't I go here, maybe I'll produce 9,000 units

where the marginal cost, all of a sudden

is higher than our marginal revenue

and the reason why that won't make any sense to do

is because if you produce that many units

then all of a sudden

each of the incremental units

that you're producing beyond the 8,000

you're losing money on those

That 8,000 and first unit

the marginal cost is going to be higher

than the marginal revenue

that you're bringing in on that unit

so you're going to be losing money

You're going to start having a lower profit

than even the negative 240 dollar loss

so we'll start going into negative 240 something

negative 250 and so forth and so on

so you still don't wanna produce beyond that point

and we'll touch more deeply on that in future videos

but this is essentially what differentiates

the short term supply curve

from the long run supply curve

In the short term

we're going to assume that we have these fixed costs

and so, it's just going to make sense

to produce equivelent to our marginal costs

But over the long run

maybe our fixed items

our capital

our machinery wears off

or maybe the contract for my emplyees wears off

and then we have a different cost structure

over the long term

and we'll think about that in another video

But the simple answer is

assuming these really are your fixed costs

you still want to produce as many units as possible

so that your marginal cost

is equal to your marginal revenue

which in this case, is the market price

We are price takers

so it actually is a rational thing

to produce 8,000 units and take a loss on that

and take 240 dollar per week loss

as opposed to producing nothing

and taking a thousand dollar per week loss

now, it might not be rational

once these things have been worn out

like your robots and your employee's contracts

it might not be rational

to continue them past their term

and we'll think about that more in another video

because, obviously, we are running at a loss

and this is not necessarily a good business to be in

but now that we've gotten int the business

we might as well stay in it

in order to recoup some of our costs here

or at least spread them out

or at least not have a thousand dollar per week loss

Anyways. See you in the next video

here i want to explain the reason ,,Why is marginal revenue below average revenue for a monopolist? A mathematical connection between average revenue and marginal revenue stating that the change in the average revenue depends on a comparison between average revenue and marginal revenue. For perfect competition, with no market control, marginal revenue is equal to average revenue, and average revenue does not change. For monopoly and other firms with market control, marginal revenue is less than average revenue, and average revenue falls. The relation between average revenue and marginal revenue',500,400)">marginal revenue is one of several that reflect the general relation between a marginal and the corresponding average. The general relation is this: If the marginal is less than the average, then the average declines. If the marginal is greater than the average, then the average rises. If the marginal is equal to the average, then the average does not change. This general relation surfaces throughout the study of economics. It also applies to average and marginal product, average and marginal cost, average and marginal factor cost, average and marginal propensity to consume, and well, any other average and marginal encountered in economics.