Chapter 5 Section 2 What are the costs of production?

1. Economics Chapter 5 Section 2 What are the costs of production?

2. What Are the Costs of Production? • Marginal product • change in total output caused by adding one worker • Specialization • having a worker focus on one aspect of production

3. Labor Affects Production • Marginal Product Schedule • Marginal product schedule—relation between labor, marginal product • Increasing returns—new workers cause marginal product increase • Diminishing returns—total output grows at decreasing rate • Negative returns—output decreases through crowding, disorganization

4. Why do Janine’s increasing returns peak with six employees?

5. Production Costs • Fixed costs—expenses owners incur no matter how much they produce • Examples: mortgage, insurance, manager salaries, machinery

6. Production Costs • Variable costs—expenses that vary as level of output changes • Examples: workers’ wages, electricity, materials, shipping • the more a business produces, the more variable costs increase • cutting back hours or workers, vacation closings decrease costs

7. Production Costs • Total cost—the sum of fixed and variable costs • Marginal cost—additional cost of making one more unit of the product • Calculating marginal cost: • divide change in total cost by change in total product • Diminishing returns result in increase in marginal cost

8. Why does it cost Janine more to produce 65 pairs of jeans with 11 workers than t produce 66 pairs of jeans with 9 workers?

9. Earning the Highest Profit • EXAMPLE: Production Costs and Revenues Schedule • To make most profit, owner decides number workers hired, units made • To decide, owner performs marginal analysis • comparison of costs, benefits of adding a worker, making another unit • Profit-maximizing output—level of production yielding highest profit • marginal cost and marginal revenue are equal

10. Earning the Highest Profit • Marginal revenue—money made from sale of each additional unit sold • same as price • Total revenue—income from selling a product • Total revenue = P (price) x Q (quantity purchased at that price)

11. Earning the Highest Profit

12. How does Janine calculate her total revenue and profits when she produces 42 pairs of jeans?What happens to Janine’s profits when she increases production from 66 to 67 pairs of jeans? Why does this happen?If the price of jeans increased to $22 per pair, how would it affect Janine’s total revenue and profit?

13. Questions • Why does the marginal cost in Janine’s factory decrease as marginal product increases? • What changes for a company when it reaches the break-even point?

14. Questions 3. Suppose that you own a video store that has total costs of $3,600 per month. If you charge $12 for each DVD you sell, how many do you need to sell each month to break even? Explain how you arrived at your answer.

15. Questions 4. Many companies choose to manufacture their products in countries where workers are paid lower wages than in the U.S. Which variable costs increase and which decrease as a result of this decision? Why do companies make this choice? Consider what you know about the relationship of costs to profits as you answer.

16. 5. Add two columns to this chart: Total Costs and Marginal Costs. Use the information given to complete those two columns.