1. Warm-up How do the owners of fast-food restaurants know how much food to produce each day? What would happen to the owner’s profits if they made too much or too little?

2. Ch. 5 Sect. 2 & 3 Costs of Production
Goals:
1. Explain the connection between labor levels and output. (marginal returns)
2. Analyze the production costs of a firm.

3. Labor and Output
Business owners have to decide how many workers to hire and how that will affect production output. ex. Small Bean Bag factory w/ one sewing machine, one pair of scissors As the # of workers increases, what will happen to the quantity of beanbags that can be made? One worker = 4 bean bags Two workers = 10 bean bags etc. Marginal Product- Change in output that occurs from hiring one more worker

4. 3 Stages of Production – AKA Marginal Production Theory
Increasing Marginal Returns-
level of production where the difference in output goes up with each additional worker (green area)
Diminishing Marginal Returns level of production where the difference in output goes down with each additional worker (yellow area)
Negative Marginal Returns-
level of production where adding workers decreases overall output
(red area)

5. 3 Stages of Production- explained
Increasing Marginal Returns – workers & company benefit from specialization- less time switching between tasks and increased efficiency = more is produced Diminishing Marginal Returns – benefit of specialization ends, and workers are limited by amount of capital avail. (sewing machine and scissors) waiting times or slow periods = more is produced but at lower levels Negative Marginal Returns – too many workers can get each others way and cause distractions = overall output goes down

6. Production Costs and Setting Output
Profit= Total Revenue – Total Cost Looking at Profit column – firm would make 144 beanbags /hr Marginal Revenue- additional income from selling one more of a good (usually equal to price) Ideal level of output: Marginal Revenue = Marginal Cost
What would happen if the market price went up to $22?

7. Goals: 1. Explain the connection between labor levels and output
Goals: 1. Explain the connection between labor levels and output. (marginal returns) 2. Analyze the production costs of a firm.