(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 319

294 PART 2 • Producers, Consumers, and Competitive Markets
an output of q1. Now suppose the price of one input increases. Because it now costs
more to produce each unit of output, this increase causes the marginal cost curve to
shift upward from MC1 to MC2. The new profit-maximizing output is q2, at which
P ϭ MC2. Thus, the higher input price causes the firm to reduce its output.
If the firm had continued to produce q1, it would have incurred a loss on the
last unit of production. In fact, all production beyond q2 would reduce profit.

E XA MPLE 8.4 THE SHORT-RUN PRODUCTION OF PETROLEUM PRODUCTS
Suppose you are managing an
oil refinery that converts crude oil
into a particular mix of products,
including gasoline, jet fuel, and
residual fuel oil for home heating. Although plenty of crude oil
is available, the amount that you
refine depends on the capac-

Cost
(dollars per
barrel)

ity of the refinery and the cost of
production. How much should you
produce each day?4
Information about the refinery’s marginal cost of production is essential for this decision.
Figure 8.8 shows the short-run
marginal cost curve (SMC).

77

SMC

76

75

74

73
8000

9000

10,000

11,000

Output (barrels per day)

F IGURE 8.8

THE SHORT-RUN PRODUCTION OF PETROLEUM PRODUCTS
As the refinery shifts from one processing unit to another, the marginal cost of
producing petroleum products from crude oil increases sharply at several levels
of output. As a result, the output level can be insensitive to some changes in price
but very sensitive to others.

4
This example is based on James M. Griffin, “The Process Analysis Alternative to Statistical Cost
Functions: An Application to Petroleum Refining,” American Economic Review 62 (1972): 46–56. The
numbers have been updated and applied to a particular refinery.