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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

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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.

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

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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.

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How much money a producer spends oncheese depends on how many pizzas the

producer sells.

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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.

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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.

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Hiring a worker may increase production.

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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.

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Increasing marginal returns occurs whenhiring one additional worker increases

production.

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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.

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Too many workers only get in eachother’s way.

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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?