Costs of Production How much to produce?

Labor and Output How the number of workers affects total production?

Labor and Output Does more workers = greater productivity? –To a point. Adding workers will increase production…but at some point, production will begin to decrease.

Marginal product of labor Marginal product of labor – the change in output from hiring one more worker. Measures the change in output at the margin – where the last worker was hired or fired.

Increasing marginal returns Increasing marginal returns – A level of production in which the marginal product of labor increases as the number of workers increases.

Diminishing marginal returns Diminishing marginal returns – A level of production in which the marginal product of labor decreases as the number of workers increases.

Negative marginal returns Negative marginal returns – When adding an additional worker, actually decreases output. Added workers disrupt production.

Production Costs Production costs are divided into two categories: Fixed cost – a cost that does not change, no matter how much of a good is produced. Variable cost – costs that rise and fall depending on quantity produced.

Production Costs Total cost – fixed costs + variable costs Marginal cost – the additional cost of producing one more unit

Setting Output How do firms set output to maximize profit?

Setting Output One way – look for the largest gap between total cost and total revenue at a certain level of output.

Setting Output Another way – find the output level were marginal revenue (the additional income from selling one more unit of a good; sometimes equal to price) is equal to marginal cost.

Setting Output Operating Cost – the cost of operating a facility, such as a store or factory. Includes the variable costs that keep the factory producing but not the fixed costs which must be paid whether the factory produced or not. Helps determine if a firm should continue operate if it’s costs exceed its revenue.