Do Now 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 LaborSetting 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