Costs of Production

1. Costs of Production In this lesson, students will identify the various costs of production. Students will be able to identify and/or define the following terms: Fixed Costs Variable Costs Marginal Product of Labor E. Napp

2. A Variable Cost • A VARIABLE COST IS A COST THAT RISES OR FALLS BASED ON PRODUCTION. • An example of a variable cost is the cost of raw materials. • The more pizzas sold, the more money spent on cheese. E. Napp

3. How much money a producer spends on cheese depends on how many pizzas the producer sells. E. Napp

4. A Fixed Cost • A FIXED COST IS A COST THAT DOES NOT CHANGE MUCH NO MATTER HOW MUCH IS PRODUCED. • An example of a fixed cost is rent. • Regardless of how many goods a producer sells, the rent must be paid each month. The rent does not change based on the producer’s sales. E. Napp

5. Examples of Fixed Costs Mortgage payment/Rent 17,000 Property Tax 3,200 Equipment (purchase or loan) 10,780 Business License 5,000 E. Napp/Helf

6. Regardless of the number of pizzas sold, you only pay rent once a month; once you pay for an oven, you own it. E. Napp

7. Total Costs • FIXED COSTS + VARIABLE COSTS = TOTAL COSTS • A producer’s total costs include his fixed costs and his variable costs. • Therefore, total costs change every month because variable costs change each month. E. Napp

8. E. Napp

9. The Marginal Product of Labor • Businesses can increase output by hiring more workers. • THE CHANGE IN OUTPUT RESULTING FROM ADDING ONE MORE WORKER IS THE MARGINAL PRODUCT OF LABOR. • Thinking at the margins is deciding whether to add or subtract one additional unit. E. Napp

10. Marginal Productivity Workers Total Product Marginal Prod. • 3 12 (What they add) E. Napp

11. Marginal Productivity Workers Total Product Marginal Prod. • 3 12 • 4 19 +7 E. Napp

12. Marginal Productivity Workers Total Product Marginal Prod. • 3 12 • 4 19 +7 • 5 29 +10 E. Napp

13. Marginal Productivity Workers Total Product Marginal Prod. • 3 12 • 4 19 +7 • 5 29 +10 • 6 42 +13 E. Napp

14. Increasing marginal returns occurs when hiring one additional worker increases production. E. Napp

15. Increasing Marginal Returns • INCREASING MARGINAL RETURNS OCCURS WHEN HIRING ONE ADDITIONAL WORKER INCREASES PRODUCTION. • Ideally, hiring one additional worker will lead to greater efficiency and production. • Producers want to increase production. E. Napp

16. Increasing Marginal Returns • What causes INCREASING marginal return? E. Napp

17. Increasing Marginal Returns • What causes INCREASING marginal return? • Specialization • Utilization of equipment • Not swapping tasks E. Napp

18. Marginal Productivity Workers Total Product Marginal Prod. • 3 12 • 4 19 +7 • 5 29 +10 • 6 42 +13 • --- --- --- --- • 8 61 • 9 66 +5 E. Napp

19. Marginal Productivity Workers Total Product Marginal Prod. • 3 12 • 4 19 +7 • 5 29 +10 • 6 42 +13 • --- --- --- --- • 8 61 • 9 66 +5 • 10 67 +1 • 11 65 -2 E. Napp

20. Diminishing Marginal Returns • DIMINISHING MARGINAL RETURNS OCCURS WHEN HIRING ONE ADDITIONAL WORKER DECREASES PRODUCTION. • Think about it. If you hire too many workers, there will not be enough machines or equipment to keep everyone busy. Some workers will have nothing to do or get in the way of other workers. E. Napp

21. Too many workers only get in each other’s way. E. Napp

22. Decreasing Marginal Returns • What causes DECREASING marginal return? E. Napp

23. Decreasing Marginal Returns • What causes DECREASING marginal return? • Not enough equipment • Lower job skills • Getting in peoples way • Lost communications • Bureaucracy E. Napp

24. Questions for Reflection: • What are a producer’s total costs? • How do fixed costs differ from variable costs? • Define marginal product of labor. • Define increasing marginal returns. • Why do producers try to avoid diminishing marginal returns? • What is thinking at the margins? E. Napp