1. Costs of Production

3. Labor & Output Terms: Basic Question: How many workers should I hire?
Marginal product of labor
change in output from hiring one additional worker
Increasing marginal returns
a level of production in which the marginal product of labor increases as the number of workers increases
Diminishing marginal returns
a level of production in which the marginal product of labor decreases as the number or workers increases

5. Analyzing Marginal Product of Labor
Labor (number of workers)
Output (beanbags per hour)
Marginal product of labor — 1 4 2 10 6 3 17 7 4 23 6 5 28 31 3 7 32 1 8 –1
Question: Where is the point of Negative Marginal Returns?

6. Another Visual Representation
Increasing, Diminishing, and Negative Marginal Returns
Labor (number of workers)
Marginal Product of labor
(beanbags per hour) 8 7 6 5 4 3 2 1 –1 –2 –3 1 2 3
Increasing marginal returns
Increasing marginal returns occur when marginal production levels increase with new investment.
Diminishing marginal returns occur when marginal production levels decrease with new investment. 4 5 6 7
Diminishing marginal returns
Negative marginal returns occur when the marginal product of labor becomes negative. 8 9
Negative marginal returns

7. Activity  Identify the Fixed Cost vs. Variable Cost
Fixed Cost – doesn’t change, regardless of how much of a good is produced.
Variable Costs - rise or fall depending on how much is produced.

8. Total Cost & Marginal Cost
Fixed cost + Variable Costs
Cost of producing one more unit of a good

9. Vocabulary Revenue Marginal Revenue:
Additional income from selling one more unit of a good; sometimes equal to price
Total Revenue:
The price of each good multiplied by the number of goods sold
Profit:
Biggest gap between total revenue &total cost
(what you get to take home!)

10. How much to produce?
Marginal Revenue -additional income from selling one more unit of a good.
Usually equal to price.
Best level of output =the output level at which marginal revenue is equal to marginal cost.
MR = MC
Rule for stopping production at the point where firms make most profit

11. Practice: What is the total cost when output is 2?
Fixed Cost
Variable Cost 1 $5
$10 2
$27 3
$55 4
$91 5
$145
What is the total cost when output is 2?
What is the marginal cost of the third unit?
How much should this firm produce if the market price is $24?

12. Answers What is the total cost when output is 2? 32
Fixed Cost
Variable Cost 1 $5
$10 2
$27 3
$55 4
$91 5
$145
What is the total cost when output is 2? 32
What is the marginal cost of the third unit? 28
How much should this firm produce if the market price is $24? 2

15. Downsizing Product Size When Production Costs Rise:

16. MIND THE GAP: https://www.youtube.com/watch?v=W4uB33V2zds

17. Shutdown Decision:
Operating Cost: cost of operating a facility such as a store or factory
What if a firm can’t reach a point where MR=MC?
What if the total revenue is less than total cost?
You can lose less money by staying open than paying your fixed costs & staying closed

18. What purpose does price serve?
Prices help move land, labor, and capital into hands of producers, and finished goods in to hands of buyers.
Prices create efficient resource allocation for producers & language that both consumers & producers can use.

19. Language of Prices:
1. Prices as an Incentive
Prices communicate to both buyers & sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production.
2. Signals
Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less.

20. Language of Prices (contd.)
3. Flexibility
In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand.
4. Price System is "Free"
Unlike central planning, a distribution system based on prices costs nothing to administer.

21. Real World Example - Matinee Prices:
To encourage customers to attend movies during afternoon theaters discount tickets prices for matinees.
Customers who can attend during matinee times are more flexible, or price elastic. Work & school limit options that many potential customers have. 
Result - theaters discount matinee prices to encourage movie goers who have elastic demand and are willing to watch at a less crowded time.
Theaters also willing to discount price of matinee shows since films that are shown are rented on a weekly basis.
Means that variable cost of being open during the day is essentially limited to paying a few employees minimum wage.
Can make additional profits if just a few dozen people show up.

22. SHARK TANK: BALLOONING COSTS
balloon/view