Economics. Marginal product change in total output caused by adding one worker Specialization having a worker focus on one aspect of production What Are.

Economics

Marginal productchange in total output caused

by adding one worker Specialization

having a worker focus on one aspect of production

What Are the Costs of Production?

Labor Affects Production

Marginal Product ScheduleMarginal product schedule—relation

between labor, marginal productIncreasing returns—new workers cause

marginal product increaseDiminishing returns—total output grows at

decreasing rateNegative returns—output decreases

through crowding, disorganization

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

Production Costs

Fixed costs—expenses owners incur no matter how much they produce○Examples: mortgage, insurance,

manager salaries, machinery

Production CostsVariable costs—expenses that vary as

level of output changesExamples: workers’ wages, electricity,

materials, shipping

○ the more a business produces, the more variable costs increase

○cutting back hours or workers, vacation closings decrease costs

Production CostsTotal cost—the sum of fixed and

variable costsMarginal 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

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?

Earning the Highest Profit EXAMPLE: Production Costs and Revenues

ScheduleTo make most profit, owner decides number

workers hired, units madeTo 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

Earning the Highest Profit Marginal revenue—money made from

sale of each additional unit soldsame as price

Total revenue—income from selling a productTotal revenue = P (price) x Q (quantity

purchased at that price)

Earning the Highest Profit

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?

Questions

1. Why does the marginal cost in Janine’s factory decrease as marginal product increases?

2. What changes for a company when it reaches the break-even point?

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.

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.

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

Total Product Fixed Cost ($) Variable Costs ($)

0 500 0

25 500 800

50 500 1200

100 500 1800

175 500 2550

275 500 3350

350 500 4250

400 500 5750