COSTS OF PRODUCTION How do producers decide how much of a good to produce?

LABOR AND OUTPUT How many workers should be hired How the number of workers will affect production Marginal Product of Labor The change in output from hiring one more worker It measures the change in output at the margin, where the last worker has been hired of fired

INCREASING MARGINAL RETURNS Specialization increases output per worker Each worker that is add to the production of a good leads to more specialization which improves production

DIMINISHING MARGINAL RETURNS The point that adding more workers increases total output, but at a decreasing rate. A producer with diminishing marginal return of labor will produce less and less output from each additional unite of labor This is true because workers must work with limited amounts of capital

NEGATIVE MARGINAL RETURNS Adding workers at a point can actually decrease output Why? Workers get in each other’s way Disruption in the production process

PRODUCTION COSTS We divide a producers costs into two categories: fixed and variable costs. Fixed Cost A cost that does not change no matter how much is produced (Rent, machinery,) Variable Cost Cost that move up or down depending on production quantity. They include things like raw materials and labor

PRODUCTION COSTS CONT. Total Cost Adding together of both the fixed and variable cost. Marginal Cost The cost of producing one more unite

SETTING OUTPUT The goal of all producers is to maximize profits. Profits is the total revenue minus total coast Total revenue is the money a producer makes by selling its product and it is equal to the price of each good multiplied by the number of goods sold.

Marginal Revenue and Marginal Cost The way to find the best level of output is to find the output level where marginal revenue is equal to marginal cost. Marginal revenue is the additional income from selling one more unit If a producer does not have control of market price than marginal revenue is equal to the market price