Business Production Decisions Productivity and Costs decisions Intro: You make production decisions everyday: Homework Input-3 hours Output—good grade

Cost of Production The costs of production directly affect the amount of profit a business makes. Raw Materials Labor Capital Equipment Rent Utilities

Costs of Production Fixed Costs—Production costs that do not change as the level of output changes. Ex. Rent, taxes, salaries

Costs of Production Variable Costs—Changes as the level of output changes. Ex. Raw materials, wages, Total Costs—The sum of fixed and variable production costs for a business. TC = FC + VC

Making Decisions at the Margin Producers like to operate at maximum efficiency. This means they want to MAXIMIZE PROFITS – Make the most amount of revenue while incurring the least amount of costs Profit= TR-TC How do they do this? By analyzing MARGINAL REVENUES AND MARGINAL COSTS

Making Decisions at the Margin Marginal Product—The change in output generated by adding one more unit of input. Pizza—5 people produce 100 pizzas/day Add 1 more person: 115 pizzas produced/day What was the marginal product? ______ Marginal Revenues – The additional revenue gained by selling one additional unit MR=Price Marginal Costs—The additional costs of producing one more unit of output. MC= VC (new output level) - VC (previous output level)

Making Decisions at the Margin Producers can maximize profit where MR=MC

Law of Diminishing Returns Describes the effect that varying the level of an input has on total and marginal product. (Productivity increases up to a point, then the marginal product starts to fall.) Back to the Homework example At what point does it stop benefiting you to study more?