1. Costs of Production Unit 5.2

2. Labor and Output To produce goods, labor is necessary. Assuming that the amount of materials to make a product remain the same, as the number of workers increases, the ability of each worker to make more of a product also increases, up to a point. As workers are added to a workforce, there tends to be a synergistic effect, where each person works more efficiently as more workers are added. This effect applies until the number of workers increases to the point where they are getting in each others way. The addition of workers as output increases per worker is known as increasing marginal returns. This is where we look at the production of the last person hired, and how adding one new worker will affect the performance of the whole. Once a peak is reached, the addition of new workers does not increase the output of the whole, and it begins to decrease, this is known as diminishing marginal returns. If workers keep being added, there will come a point of having negative marginal returns, where the amount produced will actually start going backwards in response to adding a new worker.

3. Production Costs Production costs come in fixed and variable costs. These are the costs that go into how much a product will ultimately cost the consumer. Fixed costs are costs that do not change (much) as each product is made. Some examples of this can be the rent of the building(s), maintenance on machinery, salaries of individuals who need to keep working even if production is stopped. Variable costs can be the salaries of workers who do not get paid if production stops, the costs of materials, and utilities such as electricity and air conditioning. Total costs are the complete costs for making the products. This adds together all of the different costs. Marginal costs are the costs increasing or decreasing production at a given level, such as producing one more item, or adding one more worker.

4. Earning The Highest Profit Marginal Revenue – Profit for making the next item Total Revenue Profit – Total Revenue – Total Cost Profit Maximizing Output – When Marginal Revenue and Marginal Costs are the same, profit is maximized.