Costs of ProductionWarm-up: When should we stop hiring employees?

Marginal Product

•Marginal product is the change in total output brought about by adding one more worker

•A farmer has 3 workers that pick about 300 apples a day in his/her apple orchard.▫If the farmer hires a 4th worker and now

they all pick 390 apples a day, then the marginal product is 90 apples.

Specialization

•Specialization is having a worker focus on one particular aspect of production.

•Perhaps the 4th worker didn’t pick apples, but focused on assisting the other 3 workers, allowing them to specialize in only picking apples.

Examples of Specialization

•What examples of specialization can you think of in a business?

•In an office: Manager, Janitor, Sales people, Information desk, Secretary, etc…

•All of these people focus on one particular aspect of work to allow their company to run more efficiently

Types of Returns

•Increasing returns occur when hiring new workers cause marginal product to increase.

•Diminishing returns occur when hiring new workers causes marginal products to decrease

Examples of Returns• Examples of returns: open to page 139 and look

at the marginal product schedule

• At how many workers do increasing returns stop and decreasing returns begin?

• At how many workers do we have the highest total product?

• Why might we not want to produce at the highest total product?

Types of Costs

•Fixed Costs: stay the same

•Variable Costs: may change depending on production

•Total Costs: Fixed costs plus variable costs

•Marginal Cost: the cost of one additional unit

Example of Costs

•How to calculate marginal cost?▫Divide the change in total cost by the

change in total product

Group Activity

•Get into groups and on one separate sheet of paper create examples of variable and fixed costs for:▫Farmers▫Manufacturers▫Service Providers (Mechanic, Electrician)▫Retailers (Shops)

Warm-up

•What should a business owner care about the most?▫How much they sell, how many people they

employ, how much they make, their total costs?

Earning the Highest Profit

•Marginal Revenue is the money made from the sale of each additional unit of output.

•Marginal Revenue = Price

•Total Revenue is the total amount of money received from selling a product.

•Total Revenue = P x Q

Profit-maximizing output

•This is the level of production at which a business realizes the greatest amount of profit.

•Profit = total revenue – total cost.

•Typically when marginal revenue = marginal cost

Profit Role Play Activity

•Follow the scenario closely•Each statement will give you some

information in order to fill out the production costs and revenues schedule.