Costs of Production: http://economicsoftheoffice.com/all/?eps=5_25

When considering what crops to plant, farmers are influenced by many factors, including soil condition, expected rainfall or access to irrigation and what climate they are in.

Labor & Output Terms: Basic Question: How many workers should I hire? (Firms consider how it will affect their TOTAL production) Marginal product of labor change in output from hiring one additional worker Increasing marginal returns a level of production in which the marginal product of labor increases as the number of workers increases Diminishing marginal returns (Too Many Cooks in Kitchen) A level of production in which marginal product of labor decreases as number or workers increases

Analyzing Marginal Product of Labor: Where does production decrease w/more workers? Marginal Product of Labor Labor (number of workers) Output (beanbags per hour) Marginal product of labor — 1 4 2 10 6 3 17 7 4 23 6 5 28 31 3 7 32 1 8 –1 Question: Where is the point of Negative Marginal Returns?

Another Visual Representation Increasing, Diminishing, and Negative Marginal Returns Labor (number of workers) Marginal Product of labor (beanbags per hour) 8 7 6 5 4 3 2 1 –1 –2 –3 1 2 3 Increasing marginal returns Increasing marginal returns occur when marginal production levels increase with new investment. Diminishing marginal returns occur when marginal production levels decrease with new investment. 4 5 6 7 Diminishing marginal returns Negative marginal returns occur when the marginal product of labor becomes negative. 8 9 Negative marginal returns

Fixed Cost vs. Variable Cost: Fixed Cost – doesn’t change, regardless of how much of a Variable Costs - rise or fall depending on how much is produced. good is produced. Think of a Drama Club & all the people involved: Actors, director, set builders, musicians All employed in production How do they decide what to charge for each ticket in order to make a profit? http://economicsoftheoffice.com/all/?jel=D01& cha=Dwight

Rent? Utilities? Wages? Cost of Inputs? Salaries? Insurance? Fixed or Variable? Rent? Utilities? Wages? Cost of Inputs? Salaries? Insurance?

Total Cost & Marginal Cost Fixed cost + Variable Costs Marginal Cost: Cost of producing one more unit of a good

Marginal Revenue: Additional income from selling one more unit of a good; sometimes equal to price Total Revenue: The price of each good multiplied by the number of goods sold Profit: Total revenue minus total cost (what you get to take home!)

How much to produce? Best level of output = output level at which marginal cost is equal to marginal revenue MR = MC (Rule for stopping production at the point where firms make most profit) Profit: gap between total revenue &total cost (what you get to take home!)

Practice: What is the total cost when output is 2? Fixed Cost Variable Cost 1 $5 $10 2 $27 3 $55 4 $91 5 $145 What is the total cost when output is 2? What is the marginal cost of the third unit? How much should this firm produce if the market price is $24?

Answers What is the total cost when output is 2? 32 Fixed Cost Variable Cost 1 $5 $10 2 $27 3 $55 4 $91 5 $145 What is the total cost when output is 2? 32 What is the marginal cost of the third unit? 28 How much should this firm produce if the market price is $24? 2

Downsizing Product Size When Production Costs Rise:

MIND THE GAP: https://www.youtube.com/watch?v=W4uB33V2zds

Shutdown Decision: Operating Cost: cost of operating a facility such as a store or factory What if a firm can’t reach a point where MR=MC? What if the total revenue is less than total cost? You can lose less money by staying open than paying your fixed costs & staying closed

Language of Prices: 1. Prices as an Incentive Prices communicate to both buyers & sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production. 2. Signals Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less.

Language of Prices (contd.) 3. Flexibility In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand. 4. Price System is "Free" Unlike central planning, a distribution system based on prices costs nothing to administer.

SHARK TANK: BALLOONING COSTS http://www.criticalcommons.org/Members/joyofecon/clips/wine- balloon/view