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. Examples of Fixed Costs Salaries (management) $300,000 11% Utilities 14,500 .5% Mortgage payment/Rent 17,000 .6% Property Tax 3,200 .02% Loan Interest 10,780 .4% Business License 10,000 .4% E. Napp/Helf

3. A Fixed Cost • A COST THAT DOES NOT CHANGE BECAUSE OF QUANTITY PRODUCED. • An example of a fixed cost is rent. • Regardless of how many goods a producer sells, the same rent is paid each month. • Which factor of production is this? E. Napp

4. Regardless of the number of pizzas sold, the rent must be paid. E. Napp

5. A Variable Cost • A COST THAT RISES OR FALLS BASED ON THE QUANTITY PRODUCTION. • Examples? E. Napp

6. A Variable Cost • A COST THAT RISES OR FALLS BASED ON THE QUANTITY PRODUCTION. • Examples? • The more pizzas sold, the more money spent on cheese. • Which factors of production is this? E. Napp

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

8. Total Costs • Fixed costs + variable costs = Total costs • A producer’s total costs include his fixed costs and his variable costs. • Total costs change every month because variable costs change each month. E. Napp

9. E. Napp

10. 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

11. Hiring a worker may increase production. E. Napp

12. Increasing Marginal Returns • 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

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

14. 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

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

16. 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