Transcript Costs of Production

Costs of Production
How much to
produce?
Labor and Output
• How the number of
workers affects total
production?
Labor and Output
• Does more workers =
greater productivity?
– To a point. Adding
workers will increase
production…but at some
point, production will
begin to decrease.
Marginal product of labor
• Marginal product of labor – the change in
output from hiring one more worker.
• Measures the change in output at the
margin – where the last worker was hired
or fired.
Increasing marginal returns
• Increasing
marginal returns –
A level of
production in
which the marginal
product of labor
increases as the
number of workers
increases.
Diminishing marginal
returns
• Diminishing marginal returns – A level of
production in which the marginal product
of labor decreases as the number of
workers increases.
Negative marginal returns
• Negative marginal returns – When adding
an additional worker, actually decreases
output. Added workers disrupt
production.
Production Costs
• Production costs are divided into two
categories:
• Fixed cost – a cost that does not change,
no matter how much of a good is
produced.
• Variable cost – costs that rise and fall
depending on quantity produced.
Production Costs
• Total cost – fixed costs + variable costs
• Marginal cost – the additional cost of
producing one more unit
Setting Output
• How do firms set output to maximize
profit?
Setting Output
• One way – look for the largest gap
between total cost and total revenue at a
certain level of output.
Setting Output
• Another way – find the output level were
marginal revenue (the additional income
from selling one more unit of a good;
sometimes equal to price) is equal to
marginal cost.
Setting Output
• Operating Cost – the cost of operating a
facility, such as a store or factory.
• Includes the variable costs that keep the
factory producing but not the fixed costs
which must be paid whether the factory
produced or not.
• Helps determine if a firm should continue
operate if it’s costs exceed its revenue.