236 PART • Producers, Consumers, and Competitive Markets spent and the product has been released for sale, an entrepreneur is unlikely to know how many copies can be sold and whether or not he will be able to make money Finally, let’s turn to your neighborhood pizzeria For the pizzeria, the largest component of cost is fixed Sunk costs are fairly low because pizza ovens, chairs, tables, and dishes can be resold if the pizzeria goes out of business Variable costs are also fairly low—mainly the ingredients for pizza (flour, tomato sauce, cheese, and pepperoni for a typical large pizza might cost $1 or $2) and perhaps wages for a couple of workers to help produce, serve, and deliver pizzas Most of the cost is fixed—the opportunity cost of the owner’s time (he might typically work a 60- or 70-hour week), rent, and utilities Because of these high fixed costs, most pizzerias (which might charge $12 for a large pizza costing about $3 in variable cost to produce) don’t make very high profits Marginal and Average Cost To complete our discussion of costs, we now turn to the distinction between marginal and average cost In explaining this distinction, we use a specific numerical example of a cost function (the relationship between cost and output) that typifies the cost situation of many firms The example is shown in Table 7.1 After we explain the concepts of marginal and average cost, we will consider how the analysis of costs differs between the short run and the long run • marginal cost (MC) Increase in cost resulting from the production of one extra unit of output TABLE 7.1 RATE OF OUTPUT (UNITS PER YEAR) MARGINAL COST (MC) Marginal cost—sometimes called incremental cost—is the increase in cost that results from producing one extra unit of output Because fixed cost does not change as the firm’s level of output changes, marginal cost is A FIRM’S COSTS FIXED COST (DOLLARS PER YEAR) VARIABLE COST (DOLLARS PER YEAR) TOTAL COST (DOLLARS PER YEAR) MARGINAL COST (DOLLARS PER UNIT) AVERAGE FIXED COST (DOLLARS PER UNIT) AVERAGE VARIABLE COST (DOLLARS PER UNIT) AVERAGE TOTAL COST (DOLLARS PER UNIT) (FC) (1) (VC) (2) (TC) (3) (MC) (4) (AFC) (5) (AVC) (6) (ATC) (7) — — — 50 50 — 50 50 100 50 50 50 100 50 78 128 28 25 39 64 50 98 148 20 16.7 32.7 49.3 50 112 162 14 12.5 28 40.5 50 130 180 18 10 26 36 50 150 200 20 8.3 25 33.3 50 175 225 25 7.1 25 32.1 50 204 254 29 6.3 25.5 31.8 50 242 292 38 5.6 26.9 32.4 10 50 300 350 58 30 35 11 50 385 435 85 4.5 35 39.5