Transcript Supply and Costs of Production

Business Production Decisions
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Productivity and Costs decisions
Intro: You make production decisions
everyday:
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Homework
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Input-3 hours Output—good grade
Cost of Production
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The costs of production directly affect
the amount of profit a business makes.
Raw Materials
Labor
Capital Equipment
Rent
Utilities
Costs of Production
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Fixed Costs—Production costs that do
not change as the level of output
changes.
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Ex. Rent, taxes, salaries
Costs of Production
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Variable Costs—Changes as the level
of output changes.
Ex. Raw materials, wages,
Total Costs—The sum of fixed and variable
production costs for a business.
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TC = FC + VC
Making Decisions at the Margin
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Producers like to operate at maximum
efficiency. This means they want to
MAXIMIZE PROFITS – Make the most
amount of revenue while incurring the least
amount of costs
Profit= TR-TC
How do they do this?
By analyzing MARGINAL REVENUES AND
MARGINAL COSTS
Making Decisions at the Margin
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Marginal Product—The change in output generated
by adding one more unit of input.
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Pizza—5 people produce 100 pizzas/day
Add 1 more person: 115 pizzas produced/day
What was the marginal product? ______
Marginal Revenues – The additional revenue
gained by selling one additional unit MR=Price
Marginal Costs—The additional costs of producing
one more unit of output.
MC= VC (new output level)- VC (previous output level)
Making Decisions at the Margin
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Producers can maximize profit where
MR=MC
Law of Diminishing Returns
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Describes the effect that varying the
level of an input has on total and
marginal product. (Productivity
increases up to a point, then the
marginal product starts to fall.)
Back to the Homework example
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At what point does it stop benefiting
you to study more?