2. Section D: 5.2 Outline: “Costs of Production”: Read pages 108-114

3. Labor and Output 1. Business owners want a positive marginal product of labor 2. Increasing marginal returns occur because of specialization 3. Diminishing marginal returns: occurs because specialization ends and capital is limited 4. Negative marginal returns: when overall output decreases

5. Production Costs 1. fixed costs: rent, property tax, and salaries of workers who keep the business running even when production temporarily stops (doesn’t change during one year)

6. Production Costs 1.variable costs: electricity, heating bills, salesmen, additional resources and capital needed if supply is increased (price fluctuates during the course of a year)

7. Production Costs 3. total cost: fixed cost + variable cost 4. marginal cost: cost of producing one more unit of a good

9. Setting Output 1. Basic goal of a firm: to maximize profit 2. Profit = total revenue – total cost 3. Best level of output is when: marginal revenue (price) = marginal cost

11. Setting Output 4. When marginal cost is higher than the marginal revenue (price) then a loss occurs

12. Setting Output 5. Responding to price changes: if the price increases for a good, then a firm responds by increasing production so that the marginal revenue (price) = marginal cost

14. The Shutdown Decision 1. Why is keeping a money-losing factory open more profitable? If the total revenue exceeds the variable costs then some of the fixed costs can be covered.

15. Complete Part E in your Chapter 5 Packet