Transcript Marginal Costs

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• According to some reports, supermarkets
make a profit of three to six cents for every
dollar of revenue.
• Where does the rest of the money go????
Costs of Production
Labor and Output
• One basic question that any business
owner has to answer is how many workers
to hire.
• Owners have to consider how the number
of workers they hire will affect their total
production.
• Marginal
Product of
Labor: the
change in output
from hiring one
additional unit of
labor (person)
• 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 at which the marginal product of
labor decreases as the number of workers
increases
• Negative Marginal Returns: when workers get
in each other’s way and disrupt production, so
overall output decreases
Production Costs
• Fixed Costs: a cost that does not
change, no matter how much of a good is
produced
Production Costs
• Variable Costs: a cost that rises or falls
depending on the quantity produced
– Ex: salary for part-time employees, the cost of the
electricity that a store uses during business hours
Production Costs
• Total Costs: the sum of fixed costs plus
variable costs – the amount of money needed to
operate a business
Production Costs
• Marginal Costs: the cost of producing one
more unit of a good
Output
• Marginal Revenue: the additional income from
selling one more unit of a good; sometimes
equal to price
Output
• Average cost: the total cost divided by the
quantity produced
Output
• Operating Cost: the cost of operating a facility,
such as a factory, a store, or a school
Sum it up
• Firms look for highest marginal return product of
labor; they avoid negative marginal return
• Firms set output where marginal revenue equals
marginal cost
• Firms continue to operate as long as total revenues
exceed variable cost
• Firms make business decisions by weighing
various types of cost against various types of
revenue
To Maximize Profit…
Managing Labor
•Marginal return:
change in output from
hiring one additional
worker
•Look for highest
marginal return
•Buy capital to increase
marginal return
Setting Output
•Marginal revenue:
additional income from
selling one more unit
•Marginal cost:
additional cost from
producing one more unit
•Set output where
marginal revenue equals
marginal cost