Warm-up How do the owners of fast-food restaurants know how much food to produce each day? What would happen to the owner’s profits if they made too much or too little?

Ch. 5 Sect. 2 & 3 Costs of Production Goals: 1. Explain the connection between labor levels and output. (marginal returns) 2. Analyze the production costs of a firm.

Labor and Output Business owners have to decide how many workers to hire and how that will affect production output. ex. Small Bean Bag factory w/ one sewing machine, one pair of scissors As the # of workers increases, what will happen to the quantity of beanbags that can be made? One worker = 4 bean bags Two workers = 10 bean bags etc. Marginal Product- Change in output that occurs from hiring one more worker

3 Stages of Production – AKA Marginal Production Theory Increasing Marginal Returns- level of production where the difference in output goes up with each additional worker (green area) Diminishing Marginal Returns- level of production where the difference in output goes down with each additional worker (yellow area) Negative Marginal Returns- level of production where adding workers decreases overall output (red area)

3 Stages of Production- explained Increasing Marginal Returns – workers & company benefit from specialization- less time switching between tasks and increased efficiency = more is produced Diminishing Marginal Returns – benefit of specialization ends, and workers are limited by amount of capital avail. (sewing machine and scissors) waiting times or slow periods = more is produced but at lower levels Negative Marginal Returns – too many workers can get each others way and cause distractions = overall output goes down

Production Costs and Setting Output Profit= Total Revenue – Total Cost Looking at Profit column – firm would make 144 beanbags /hr Marginal Revenue- additional income from selling one more of a good (usually equal to price) Ideal level of output: Marginal Revenue = Marginal Cost What would happen if the market price went up to $22?

Goals: 1. Explain the connection between labor levels and output Goals: 1. Explain the connection between labor levels and output. (marginal returns) 2. Analyze the production costs of a firm.