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• According to some reports, supermarkets make a profit of three to six cents for every dollar of revenue.

• Where does the rest of the money go????

Costs of Production

Labor and Output

• One basic question that any business owner has to answer is how many workers to hire.

• Owners have to consider how the number of workers they hire will affect their total production.

• Marginal Product of Labor: the change in output from hiring one additional unit of labor (person)

• Increasing Marginal Returns: a level of production in which the marginal product of labor increases as the number of workers increases

• Diminishing Marginal Returns: a level of production at which the marginal product of labor decreases as the number of workers increases

• Negative Marginal Returns: when workers get in each other’s way and disrupt production, so overall output decreases

Production Costs

• Fixed Costs: a cost that does not change, no matter how much of a good is produced

Production Costs• Variable Costs: a cost that rises or falls

depending on the quantity produced – Ex: salary for part-time employees, the cost of the

electricity that a store uses during business hours

Production Costs

• Total Costs: the sum of fixed costs plus variable costs – the amount of money needed to operate a business

Production Costs

• Marginal Costs: the cost of producing one more unit of a good

Output• Marginal Revenue: the additional income from

selling one more unit of a good; sometimes equal to price

Output• Average cost: the total cost divided by the

quantity produced

Output• Operating Cost: the cost of operating a facility,

such as a factory, a store, or a school

Sum it up

• Firms look for highest marginal return product of labor; they avoid negative marginal return

• Firms set output where marginal revenue equals marginal cost

• Firms continue to operate as long as total revenues exceed variable cost

• Firms make business decisions by weighing various types of cost against various types of revenue

To Maximize Profit…Managing Labor Setting Output

•Marginal return: change in output from hiring one additional worker•Look for highest marginal return•Buy capital to increase marginal return

•Marginal revenue: additional income from selling one more unit•Marginal cost: additional cost from producing one more unit•Set output where marginal revenue equals marginal cost