Cost and Factors of Production

Review Remember…… Scarcity forces people to make decisions about how they will use their resources!!!

Review Economic decision making requires people to consider all the costs and benefits of a decision What are trade-offs??? What is an opportunity cost???

Cost of Production (Doing Business) Fixed Costs Costs or expenses that are the same no matter how many units of are good are produced Ex: mortgage payments, rent

Variable Costs Costs or expenses that change with the number of products produced Ex: wages, raw materials, electricity bills, water bills These costs increase when production increases and decrease when production decreases

Total Costs Fixed Costs + Variable Costs= Total Costs

Marginal Costs The extra or additional cost of producing one additional unit of an output Ex: 30 bike helmets= $1500, 31 bike helmets= $1550  marginal cost= $50

Factors of Production Remember……. Goods: tangible products Services: work that is performed for someone else

Factors of Production There are four basic factors of production These four factors are the things needed to make other things, but are not necessarily part of the product produced

How do you remember the Factors of Production?? C- Capital E- Entrepreneurship L- Land L- Labor

Capital Capital are tools and equipment to make the “thing” Example: Computer, Buildings

Entrepreneurship Entrepreneurship is the one willing to RISK money to bring together the factors for the “thing” Example: CEOs Stock-holders

Land Land is the resources provided by nature that help create the “thing” Example Milk Water Sugar

Labor Labor is all human efforts that help produce the “thing” Example: Factory workers Scientists Sales people

2 Types of Labor Blue Collar Jobs Workers that use their physical skills Examples: Plumer, Postman, Mechanic, Therapist Earns an hourly wage (Variable Cost)

White Collar Jobs Workers that use their brains for the most part of their job Examples: Lawyer, Teacher, Scientist, CEO Earns a yearly salary (Fixed Cost)

Practice Scenario Alberta wants to invite her friends over for dinner, but the only time they can come is Tuesday night when her favorite show, Gilmore Girls, is on. She decides to invite her friends because she would enjoy their company. Alberta invites seven friends over, but she needs to know how many are coming so she’ll have enough food. Alberta is making spaghetti with meatballs and has to go to the grocery store no matter how many friends decide to come. Alberta’s Opportunity Cost ____________________________________________ Alberta’s Fixed Cost _________________________________________________ Alberta’s Variable Cost _______________________________________________

Practice Scenario 2. Jack owns a shoe repair shop. His rent for the shop is $1500.00 a month. Jack pays his employees $8.00 an hour and adds a raise of $.50 for every six months they have been working at Jack’s Shoes. Since the weekend is the busiest Jack has three employees work on Friday and Saturday and only one employee on Monday through Thursday. Jack’s Fixed Cost _________________________________________________ Jack’s Variable Cost _______________________________________________ Incentive for Workers ______________________________________________