Download Ch 5-2 Note Sheet

Objectives:
1. Explain how firms decide how much labor to hire to produce a certain level of output.
2. Analyze the production costs of a firm.
3. Understand how a firm chooses to set output.
4. Explain how a firm decides to shut down an unprofitable business.
------------------------------------------------------------------------------------------------------------------------------*Producers respond to a ___________________________ just like consumers did in Demand.
*As price goes up…suppliers will ___________________________________.
*This section is dedicated to learning how much a supplier will produce with a price change.
*One of the basic questions that a business has to answer…how many ______________________.
*Owners consider how the number of workers they hire will affect their _____________________.
-Example…1 worker is hired… produces 4 beanbags/hour
2 workers…produces 10 beanbags/hour
3 workers…produces 17 beanbags/hour
-As new workers join the company, total output increases.
11 workers…produces 32 beanbags/hour
12 workers…produces 31 beanbags/hour
WHY the decrease at 12 workers????
*There is a relationship between __________, measured by the number of workers in the factory,
and the number of beanbags ____________________.
*Economists look at ___________________________ of a company adding additional labor to
work in the factory.
*___________________________- the change in output from hiring one additional unit of labor.
Labor
Output
Marginal Product
0
1
2
3
4
5
6
7
8
0
4
10
17
23
28
31
32
31
----4
*When we look at the schedule, we see that MP increases for the ______________.
*It then decreases when we hire a ______________________.
*It continues to decrease until we have hired an 8th worker and it becomes a minus number.
*The MP of labor increases for the first ___workers because there are three tasks involved in
making beanbags. {cut/sew cloth into shape; stuff the bag; and sew the bag closed}
*It is hard for a single worker to perform all ______________ and be able to produce a whole lot.
*Adding a 2nd worker would allow each worker to specialize in 1 or 2 tasks.
*__________________ increases output per worker. 3 workers would allow each one to
specialize in a single task and become much more efficient.
*_____________________________________… a level of production in which the marginal
product of labor increases as the number of workers increase.
*_____________________________________…a level of production in which the marginal
product of labor decreases as the number of workers increase.
*Diminishing Marginal Product occurs at the 4th worker being hired. Continues until we get to
7th worker.
*This happens when workers have to work with ___________________________of capital.
*Capital is any _____________________________________ that is used to produce other goods.
*Capital in this example is a single pair of scissors and a single _____________________.
*This problem gets worse as ________________ are hired. {Wasted time waiting for a machine}
*___________________________…occurs when workers get in each other’s way and disrupt the
production process. At this point, overall output decreases.
Production Costs:
*Paying workers and purchasing capital are costs of producing goods.
*2 categories…
-___________ - the cost that does not change no matter how much of a good is produced.
- ____________________ - a cost that rises or falls depending on how much is produced.
Fixed Costs include…
*________________________
* _____________________
* _______________________
* _____________________
Variable Costs include…
*___________________________
* _________________________
* __________________________________
*Total Cost = fixed costs + variable costs.
*Marginal Costs - the cost of producing one more unit of a good.
*Marginal Revenue - the additional income from selling one more unit of a good
*Total Revenue = Price x Quantity
*Profit = Total Revenue - Total Cost
Fixed Variable
Total
Marginal Marginal
Total
Beanbags
Costs
Costs
Cost
Cost
Revenue Revenue Profit
0
($36)
$36
$0
$
-----$0
$0
1
($20)
$
$8
$
$8
$24
$24
2
$
$12
$
$
$
$
3
$
$15
$
$
$
$
4
$
$20
$
$
$
$
5
$
$27
$
$
$
$
6
$
$36
$
$
$
$
7
$
$48
$
$
$
$
8
$
$63
$
$
$
$
9
$
$82
$
$
$
$
10
$
$100
$
$
$
$
11
$
$136
$
$
$
$
12
$
$173
$
$
$
$
•Each beanbag Chair is going to sell for $ 24.00
*Behind all of the decisions about how many workers to hire is the firm’s basic goal: to
_____________________________!
*Profit is defined as __________________ minus ______________________.
*Total Revenue is the money a firm gets by ___________________________________.
*Another way to find the best level of output is to find the output level where
_______________________ = __________________________.
*MR is additional income from selling ____________________________________.
*If the firm has no control over the market price, MR = the market price.
*Operating Cost - the cost of operating a _______________, such as a store or factory.
Operating Cost includes…
– Variable costs the owners must pay to keep the ________________________.
– NOT _____________________________
_____________ - increasing returns as the number of workers increase they better use of their time,
machinery, and resources.
_____________ - total production keeps growing, but by smaller and smaller amounts. The rate in
increase in total production is starting to slow down. Each additional worker is making a
diminishing contribution (although +)
_____________ - too much input - total output decreases as input increases -MP is negative - total plant
output decreases
Input of
Workers
0
1
2
3
4
5
6
7
8
9
10
11
12
Total
Marginal
Product Product
0
7
20
38
62
90
110
129
138
144
148
145
135
0
Stage
Stage 1