1. ECONOMICS BELL WORK TUESDAY, MARCH 29 TH What is the setting of this cartoon? What type of business usually lists its costs this way?

2. CHAPTER 5, SECTION 2 COSTS OF PRODUCTION

3. LABOR AND OUTPUT How can a producer maximize profits? –When thinking about how to maximize profits, producers think about the cost involved in producing one more unit of a good. –Costs producers take into consideration are: operating cost variable cost total cost marginal cost

4. LABOR AND OUTPUT Marginal Product of Labor: the change in output from hiring one additional unit of labor –Called the marginal product because it measures the change of output at the margin where the last worker has been hired or fired.

5. LABOR AND OUTPUT Specialization makes it so that each worker can focus on one or two tasks. Specialization increases output per worker. –Example: Henry Ford and the assembly line

6. LABOR AND OUTPUT Increasing Marginal Returns: a level of production in which the marginal product of labor increases as the number of workers increases

7. LABOR AND OUTPUT The addition of new workers will increase production until it reaches its peak, at which point, production actually decreases.

8. LABOR AND OUTPUT In this example, why does the marginal product of labor increase with the first three workers?

9. LABOR AND OUTPUT In this example, why does the marginal product of labor increase with the first three workers? –Because the workers can specialize in performing the three tasks in making beanbags, improving efficiency.

10. LABOR AND OUTPUT Diminishing Marginal Returns: a level of production at which the marginal product of labor decreases as the number of workers increases

11. LABOR AND OUTPUT A firm suffers from diminishing marginal returns from labor because its workers have a limited amount of capital. –Beanbag Example: One sewing machine One pair of scissors

12. LABOR AND OUTPUT What is the marginal product of labor when the factory employs five workers?

13. LABOR AND OUTPUT What is the marginal product of labor when the factory employs five workers? –five beanbags/hour

14. LABOR AND OUTPUT Why does the factory experience diminishing marginal returns with more than three workers?

15. LABOR AND OUTPUT Why does the factory experience diminishing marginal returns with more than three workers? –It can no longer benefit from specialization because there is limited physical capital. –There may not be enough equipment for more than three workers.

16. PRODUCTION COSTS Fixed Costs: a cost that does not change, no matter how much of a good is produced –Examples: the cost of the building/rent equipment for production property taxes the salaries of people who run the business, even when production temporarily stops

17. PRODUCTION COSTS Variable Costs: costs that rise or fall depending on the quantity produced –Examples: raw materials some labor heating bills

18. PRODUCTION COSTS Let’s build our own business! –What are some examples of fixed costs?

19. PRODUCTION COSTS Let’s build our own business! –What are some examples of fixed costs? –What are some examples of variable costs?

20. PRODUCTION COSTS Let’s build our own business! –What are some examples of fixed costs? –What are some examples of variable costs? –Would an advertisement for the our store that runs every week in the Macomb Daily be a fixed cost or a variable cost?

21. PRODUCTION COSTS Total Cost: the sum of fixed costs PLUS variable costs –Knowing the total cost of several levels of output helps determine the additional costs of producing one more unit.

22. PRODUCTION COSTS Marginal Cost: the cost of producing one more unit of a good –Beanbag Example: 0 beanbags = $36/hour (fixed costs) 1 beanbag = $44/hour –(fixed costs + additional costs need to produce one more item) –The marginal cost of the first beanbag is $8

23. PRODUCTION COSTS Marginal Cost Example: Cars –If producing more vehicles requires a new factory, the marginal cost of the first vehicle from that assembly line includes the cost of the factory.

24. CHECKPOINT QUESTION Why does a closed factory still have production costs?

25. CHECKPOINT QUESTION Why does a closed factory still have production costs? –The owner must sill pay fixed costs such as rent.

26. SETTING OUTPUT Basic goal of all firms: increase profits Total Profit = Total Revenue – Total Cost –Total Revenue: the money a firm gets from selling a product

27. SETTING OUTPUT Marginal Revenue: the additional income from selling one more unit of a good –A way to find the best level of output is where the marginal revenue is equal to marginal cost –Beanbag Example: Marginal revenue ($24) is the price at which I can sell each beanbag. If I charge customers $25, people will buy their beanbags elsewhere.

28. PRODUCTION COSTS When Marginal Cost = Marginal Revenue, Profit is the highest

29. PRODUCTION COSTS The most profitable level of output is where marginal revenue is equal to marginal cost.

30. PRODUCTION COSTS The most profitable level of output is where marginal revenue is equal to marginal cost.

31. CHECKPOINT QUESTION What is a firm’s basic goal when it sets its level of output?

32. CHECKPOINT QUESTION What is a firm’s basic goal when it sets its level of output? –To maximize profit. –Firms earn their highest profit when the cost of making one more unit is the same as the market price of that good.

33. SETTING OUTPUT What happens to a factory that starts to lose money? –Sometimes, even though a factory is producing at its most profitable level, the market price is so low that the factory’s total revenue is still less than its total cost. The factory owners have two choices: 1.Continue to produce goods and lose money 2.Shut down the factory

34. SETTING OUTPUT When should a firm keep a money-losing factory open? –Option 1: Continue to Produce The firm should keep the factory open if the total revenue from the goods is greater than the cost of keeping the factory open. This would work if the benefit of operating the factory is greater than the variable cost.

35. SETTING OUTPUT When should a firm keep a money-losing factory open? –Option 2: Shut Down the Factory If a firm shuts the factory down it still has to pay all of its fixed costs so it would have money going out but nothing coming in. The firm would lose an amount equal to its fixed costs.