1. Do Now 1)What is the difference between supply and quantity supplied? 2)Are hotel rooms elastic or inelastic? Why? 3)What do producers have to consider when determining the cost of their product?

2. 5.2 Costs of Production

3. Labor and Output Number of workers hired will affect total production Marginal product of labor: change in output from hiring one more worker Why would the marginal product of labor decrease eventually? Labor (# of workers) Output (beanbags per hour) Marginal product of labor 00- 144 2106 3177 4236 5285 6313

4. Labor and Output Increasing marginal returns: a level of production in which the marginal product of labor increases as the number of workers increases More workers = more specialization = increased output per worker

5. Labor and Output Diminishing marginal returns: a level of production in which the marginal product of labor decreases as the number of workers increases Once a firm hires enough workers for each task, the benefits of specialization end. –Can still increase total output, but at a decreasing rate Limited amount of capital = diminishing returns Negative marginal returns: total output decreases –Workers get in each other’s way and disrupt production process

6. What is the marginal product of labor when the factory currently employs 4 workers?

7. Production Costs Fixed costs: a cost that does not change, no matter how much of a good is produced. –Ex. rent, machinery repairs, property taxes, salaries of workers that keep business running even when production pauses Variable costs: costs that rise or fall depending on the quantity produced. –Ex. raw materials, some labor, electricity, heating –If production slows, a company may lay off workers

8. Production Costs Total cost: fixed costs + variable costs Marginal cost: the cost of producing one more unit of a good –Rising marginal cost shows diminishing returns to labor

9. Beanbags (per hour) Fixed cost Variable cost Total cost Marginal cost Marginal revenue (market price) Total revenue Profit 0$36$0$36----------$24$0$-36 136844$824 -20 2361248424480 33615513247221 43620565249640 536276372412057 636 7292414472 Why is the marginal revenue always equal to $24?

10. Setting Output Basic goal: maximize profits Profit: total revenue – total cost Total revenue: the money the firm gets by selling the product; equal to price of each good x number sold To find level of output with highest profit, look for biggest gap between total revenue and total cost

11. Beanbags (per hour) Fixed cost Variable cost Total cost Marginal cost Marginal revenue (market price) Total revenue Profit 0$36$0$36----------$24$0$-36 136844$824 -20 2361248424480 33615513247221 43620565249640 536276372412057 636 7292414472 What number of beanbags produces the highest profit?

12. Setting Output Marginal revenue: the additional income from selling one more unit of a good; sometimes equal to price (when firm has no control over market price) Can also find the best level of output when the marginal revenue = marginal cost If marginal cost is greater than price, company loses money If marginal cost is increasing and price stays constant, the losses get worse at higher levels of output If a firm chooses to produce below the best level of output, is it making as much money as it can?

13. Setting Output Responding to price changes –If the price of a beanbag rose from $24 to $37, we would predict the company would increase production so that marginal cost is equal to the new price –Raising production to match a new price allows the company to make a higher profit. What law does this demonstrate?

14. The Shutdown Decision A company can be producing at the most profitable level of profit and still be losing money. If the market price is too low, the total revenue can be less than total cost = losing money Should the company shut down? Stay open when total revenue is > cost of keeping it open Operating cost: the cost of operating a facility –Includes variable costs, but not fixed costs.

15. Beanbags (per hour) Fixed cost Variable cost Total cost Marginal cost Marginal revenue (market price) Total revenue Profit 0$36$0$36----------$24$0$-36 136844$824 -20 2361248424480 33615513247221 43620565249640 536276372412057 636 7292414472 Price drops to $7. Max level? Benefit? Shut down? Total cost? Shut down or stay open?

16. OutputFixed CostVariable Cost 1$5$10 2527 3555 4591 55145 1)What is the total cost when output is 2? 2)What is the marginal cost of the third unit? 3)How much should this firm produce if the market price is $24?