Costs of Production

Labor and Output How Many Workers to Hire? Marginal Product of Labor- change in output from hiring one more worker Increasing Marginal Returns- increasing overall output per worker Negative Marginal Returns-decreasing overall output per worker

Diminishing Returns As the stock of capital rises, the extra output produced from an additional unit of capital falls; this property is called diminishing returns.

Labor and Output Marginal product of labor is the change in output that results when a unit of labor is added. How does marginal product of labor change when a fourth worker is added?

Production Costs Fixed Costs- doesn’t change no matter how much of the good is produced Property taxes Variable Costs- change depending on the amount produced Labor Marginal Cost- additional cost of producing 1 extra unit

Production Costs All producers need to understand their fixed, variable, and total costs. Which categories of cost would increase for a business that decided to extend its hours of operation?

Production Costs Producers must identify costs and revenues to calculate profit—total revenues minus total costs. Why might this factory not seek the highest possible revenue?

Setting Output Profit =total revenue -total cost. A firm’s total revenue is the money the firm gets by selling its product. Total revenue =the price of each good x the number of goods sold. To find the level of output with the highest profit, we look for the biggest gap between total revenue and total cost. The gap is greatest and profit is highest when the firm makes 9 or 10 beanbags per hour. At this rate, the firm can expect to make a profit.

Setting Output Marginal Revenue and Marginal Cost- additional income from selling one more good or cost from producing one more good Average cost= total cost/quantity produced The Shutdown Decision Revenue v. operating cost

Setting Output

Changes in price lead to a change in the ideal level of output Changes in price lead to a change in the ideal level of output. Based on this graph, what should output be if the price fell to $20?

Changes in Supply

Input Costs and Changes in Supply Non-price determinants that alter supply shift the entire curve to the right or left. How do supply shifts differ from changes in quantity supplied based on price?

Resource Cost [wages & raw materials] [inverse] Resource Cost Example S2 S1 S3 P Resource Cost [wages & raw materials] [inverse] Increase in wages (increases/decreases) supply. Ex: A decrease in the price of computer chips (increases/decreases) the supply of computers.

Alternative Output Price Change [Inverse] These are “things that can be supplied with the same resources”. I only have 200 acres Corn Broccoli S2 S1 P1 S P2 P QS1 QS2 Producers want to produce more of the good where price is increasing, Corn Broccoli S1 P1 S S2 P P2 QS1 QS2 or at least, where the price is not going down. “Substitutes in production” [Remember, productive resources are scarce]

Technological Improvement Lowers production costs & increases SUPPLY. Technological advancment will cause a shift to the right.

Number of Producers [Direct] S3 S1 S2 P If more firms enter an industry, the supply curve will shift to the (left/right). When the American Basketball League began play in 1968, there was a (bigger/smaller) supply of basketball games each week. A new professional football league will (increase/decrease) the supply of football games.

Producer Expectations about Future Price [“INVERSE”] S2 S1 S2 P Oil Prices expected to decrease Oil Prices expected to increase If oil producers expect future oil prices to decline, they will (increase/decrease) current production. If oil producers expect future oil prices to increase, they will (increase/decrease) current production.

Subsidies – free money from government [Direct] S3 S1 S2 P Free money from the government (subsidies) induces suppliers to supply more. If subsidies are taken away, then suppliers are losing money and will decrease supply.

Taxes Take Away Business Profits & Decrease Supply. [Inverse] S3 S1 S2 P If business have their taxes decreased, it moves the supply curve to the right. If business have their taxes increased, it moves the supply curve to the (left/right).

Input Costs and Changes in Supply Changes in input costs can affect the supply of several goods or services. What generalization can you make about the relationship between input costs and supply?

Government Policies and Changes in Supply Many governments subsidize agriculture, though rates vary greatly from nation to nation. Why do you think subsidies change slightly from year to year?

Government Policies and Changes in Supply In the United States, government subsidizes the building of these commercial aircraft. Why might government subsidize this industry?

Other Non-Price Determinants That Create Changes in Supply

Other Non-Price Determinants That Create Changes in Supply

Deciding Where to Locate Firms locate close to input suppliers when inputs, such as raw materials, are expensive to transport. They locate close to consumers when output is more costly to transport.

Location near Markets The cost of transporting goods to consumers is a critical locational factor for three types of industries: bulk-gaining, single-market, and perishable. 28

Bulk-gaining Industries A bulk-gaining industry makes something that gains volume or weight during production. Soft-drink bottling 29

Location of Beer Breweries Beer brewing is a bulk-gaining industry that needs to be located near consumers. Breweries of the two largest brewers are located near major population centers. 30

Other Bulk-Gaining Industries If the fabricated product occupies a much larger volume than its individual parts, then the cost of shipping the final product to consumers is likely to be a critical factor. 31

Single-Market Manufacturers Single-market manufacturers make products sold primarily in one location, so they also cluster near their markets. Manufacturers of fashion clothing then receive large orders for certain garments to be delivered in a short time. Consequently, high-style clothing manufacturers concentrate around New York. Manufacturers demand rapid delivery of specialized components, clasps, clips, pins, and zippers. The specialized component manufacturers also concentrate in NY 32

Perishable Products Perishable-product industries must be located near their markets. WHY? Processors of fresh food into frozen, canned, and preserved products can locate far from their customers. The daily newspaper is an example of a product other than food that is highly perishable WHY?? In European countries, national newspapers are printed in the largest city during the evening and delivered by train throughout the country overnight. 33

Raw Materials and Markets

Ship, Rail, Truck, or Air? Firms seek the lowest-cost mode of transport, but the cheapest of the four alternatives changes with the distance that goods are being sent. Trucks are most often used for short- distance delivery and trains for longer distances, ship transport is attractive for very long distances. 35

Weber's model  Location depends on where the owner can most minimize the costs of running it transportation costs: site where transportation costs are lowest is where it is least costly to bring raw materials to production and also distribute products to markets. labor costs: cheap labor costs can make up for high transportation costs

Deciding Where to Locate