9/21/15  Topic: Costs of Production  EQ: How do firms decide how much of a product to produce?  Bellwork: Set up your Cornell notes. Then, answer the following question in your notes:  If the price of oil rises around the world, what will happen to oil production in Texas? Why?

Costs of Production

Labor and Output  Marginal Product of Labor is the change in output from hiring one additional unit of labor  Increasing Marginal returns is a level of production in which the marginal product of labor increases as the number of workers increases  Diminishing Marginal Returns is a level of production in which the marginal product of labor decreases as the number of workers increases

Marginal Product of Labor Labor (number of workers) Output (beanbags per hour) Marginal Product of Labor

Marginal Returns  A firm has two factories, one twice as large as the second. As the number of workers at each factory increases, which factory will experience diminishing returns first?

Production Costs  Fixed costs are costs that do not change, no matter how much of a good is produced  Rent, machinery repairs, taxes, salaries  Variable costs are costs that rise or fall depending on how much is produced  Raw materials, some labor, electricity  Total Cost is fixed plus variable costs  Marginal cost is the cost of producing one more unit of a good

Production Costs Beanbags per hour Fixed CostVariable CostTotal CostMarginal Cost 0$36 $0 $36- 1 $8 $44$8 2$36 $12 $48$4 3$36 $15 $51$3 4$36 $20 $56$5 5$36 $27 $63$7 6$36 $72$9 7$36 $48 $84$12 8$36$63$99$15 9$36$82$118$19 10$36$106$142$24 11$36$136$172$30 12$36$173$209$37

Fixed or Variable?  Repairs to a leaky roof  Fixed  Cotton  Variable  Food for a factory’s cafeteria  Fixed  Night security guard  Fixed  Electricity  Variable

Setting Output  Profit is total revenue minus total cost  Total revenue is equal to the price of each good multiplied by 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  Marginal Revenue is the additional income from selling one more unit of a good  If a firm has no control over the market price, marginal revenue equals the market price

Beanbags per hour Fixed Cost Variable Cost Total CostMarginal Cost Marginal Revenue Total Revenue Profit 0$36 $0 $36-$24$0-$36 1$36 $8 $44$8$24 -$20 2$36 $12 $48$4$24$48$0 3$36 $15 $51$3$24$72$21 4$36 $20 $56$5$24$96$40 5$36 $27 $63$7$24$120$57 6$36 $72$9$24$144$72 7$36 $48 $84$12$24$168$84 8$36$63$99$15$24$192$93 9$36$82$118$19$24$216$98 10$36$106$142$24 $240$98 11$36$136$172$30$24$264$92 12$36$173$209$37$24$288$79

Changes in Supply  There are shifters to the supply curve, just like with the demand curve.  Rising Costs - If the marginal cost increases, it may become higher than marginal revenue. If the firm has no control over the price (marginal revenue), they will have to reduce supply—the curve will shift left

Changes in Supply  Technology – Advances in technology can lower production costs. This drops marginal cost, and allows business to increase production to meet marginal revenue. The curve will shift right.  Subsidies and Taxes – A subsidy is a government payment that supports a business or market. They allow firms to earn a profit for producing more of a good, and can shift the curve right. An excise tax is a tax on the production or sale of a good, and will increase production costs, causing the curve to shift left.

Changes in Supply  Future expectations – If a firm expects the price to increase, they will store goods now in order to sell them in the future. They reduce the amount available for purchase immediately. Expectations of lower prices has the opposite effect.  Number of suppliers – As firms enter the market, supply will shift right. As firms exit a market, supply shifts left.

Decrease in Supply Increase in Supply

Shifts in Supply Will the following cause an increase or decrease in supply of American-made backpacks?  The government raises the minimum wage of backpack workers to $40 an hour  Decrease – marginal cost increases  A new regulation requires firms to make backpacks out of expensive clear plastic  Decrease – price of resources has increased  An engineer invents a machine that can sew ten backpacks a minute, speeding up production  Increase – technology lowers production cost

On your own  Read through your notes  Circle key terms  Underline main ideas  Put a star by important information  Write your questions in the left-hand column  Summarize your notes (answer the essential question)