2. Costs of Production: http://economicsoftheoffice.com/all/?eps=5_25

3. When considering what crops to plant, farmers are influenced by many factors, including soil condition, expected rainfall or access to irrigation and what climate they are in.

4. Labor & Output Terms: Basic Question: How many workers should I hire?
(Firms consider how it will affect their TOTAL production)
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 (Too Many Cooks in Kitchen)
A level of production in which marginal product of labor decreases as number or workers increases

5. Analyzing Marginal Product of Labor:
Where does production decrease w/more workers?
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. Fixed Cost vs. Variable Cost:
Fixed Cost – doesn’t change, regardless of how much of a
Variable Costs - rise or fall depending on how much is produced.
good is produced.
Think of a Drama Club & all the people involved:
Actors, director, set builders, musicians
All employed in production
How do they decide what to charge
for each ticket in order to make a profit?
cha=Dwight

8. Rent? Utilities? Wages? Cost of Inputs? Salaries? Insurance?
Fixed or Variable?
Rent?
Utilities?
Wages?
Cost of Inputs?
Salaries?
Insurance?

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

10. 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:
Total revenue minus total cost
(what you get to take home!)

11. How much to produce?
Best level of output = output level at which marginal cost is equal to marginal revenue
MR = MC (Rule for stopping production at the point where firms make most profit)
Profit: gap between total revenue &total cost
(what you get to take home!)

12. 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?

13. 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

16. Downsizing Product Size When Production Costs Rise:

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

18. 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

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. SHARK TANK: BALLOONING COSTS
balloon/view