Costs of Production Labor and Output Business owners

Costs of Production

Labor and Output ➲Business owners have to decide how many workers to hire. They must consider how the number of workers will affect their total production.

Marginal Product of Labor ➲ The change in output from hiring one more worker. Ex- The first worker hired produces 4 beanbags per hour, therefore her marginal product is 4 bags; the second worker raises the total output from 4 bags to 10 per hour so her marginal product of labor is 6.

Marginal Returns ➲Increasing Marginal Returns: When output per worker increases. This happens when new workers can produce more than previous workers.

Marginal Returns ➲ Diminishing Marginal Returns: When a firm will produce less and less output from each additional unit of labor added to the mix. This happens because workers must work with a limited amount of capital(ex. Sewing machines, scissors etc. )

Marginal Returns ➲Negative Marginal Returns: Output decreases due to disruptions from too many workers. This happens when too many workers are in one place. (Doesn’t happen very often!)

Production Costs Fixed Costs Variable Costs ➲ Costs that stay the same and do not change Mortgage/Rent Payments Car/Home Insurance Salary Workers Property Taxes that can change from time to time. Phone Bills Electric Bills Gas bills Hourly Workers Raw Materials

Total cost ➲The total sum of fixed costs and variable costs ➲Marginal cost: The additional cost of producing one more unit.

Setting Output ➲A firms goal is to MAXIMIZE PROFIT= Total Revenue – Total Cost