Download costs of production - Lemon Bay High School

COSTS OF PRODUCTION
How do producers decide how
much of a good to produce?
LABOR AND OUTPUT

How many workers should be hired

How the number of workers will affect
production

Marginal Product of Labor


The change in output from hiring one more worker
It measures the change in output at the margin,
where the last worker has been hired of fired
INCREASING MARGINAL
RETURNS

Specialization increases output per
worker

Each worker that is add to the production
of a good leads to more specialization
which improves production
DIMINISHING MARGINAL
RETURNS

The point that adding more workers
increases total output, but at a
decreasing rate.


A producer with diminishing marginal
return of labor will produce less and less
output from each additional unite of labor
This is true because workers must work
with limited amounts of capital
NEGATIVE MARGINAL
RETURNS

Adding workers at a point can actually
decrease output Why?


Workers get in each other’s way
Disruption in the production process
PRODUCTION COSTS

We divide a producers costs into two
categories: fixed and variable costs.

Fixed Cost


A cost that does not change no matter how
much is produced (Rent, machinery,)
Variable Cost

Cost that move up or down depending on
production quantity. They include things like
raw materials and labor
PRODUCTION COSTS CONT.

Total Cost


Adding together of both the fixed and
variable cost.
Marginal Cost

The cost of producing one more unite
SETTING OUTPUT



The goal of all producers is to maximize
profits.
Profits is the total revenue minus total
coast
Total revenue is the money a producer
makes by selling its product and it is
equal to the price of each good
multiplied by the number of goods sold.
Marginal Revenue and
Marginal Cost



The way to find the best level of output is to
find the output level where marginal revenue
is equal to marginal cost.
Marginal revenue is the additional income
from selling one more unit
If a producer does not have control of market
price than marginal revenue is equal to the
market price