Labor and Output

Marginal Production of Labor Diminishing Marginal Returns

Increasing Marginal ReturnsNegative Marginal Returns

The change in output from Adding one more unit of labor

Marginal Production shrinks aseach unit of input is added

Marginal Production is actually risingas each unit of input is added

Overall output actually decreases as each unit of input is

added

Variable Costs

Production Costs

Fixed CostsTotal Costs

Costs that do not changeno matter how much is produced

Costs that rise or fall with production levels

Fixed Cost + Variable Cost=

Total Cost

Setting Output

Marginal Revenue = Marginal CostThis is profit maximizing output

The firms basic goal is to maximize profits. To do so, we look for the biggest gap between total revenue and total cost

Marginal Revenue – the additional revenue from adding

one more unit of output

Marginal Cost – the additional cost of producing one more unit

Responding to Price Changes

Firms adjust output to whereMR = MC

Shutdown decisionWhen do you close the doors?

When total revenues are equal to or greater than variable costs

The firm would only lose money equal to fixed costs, which they would have to pay even if they

were shut down

It would lose less money than if it shut down

Figuring Costs and Revenues

Figuring Costs and Revenues

Fixed Cost + variable Cost =

Total Cost

Fixed Cost + variable Cost =

Total Cost

New Total Cost – Old Marginal Cost =

Marginal Cost

New Total Cost – Old Marginal Cost =

Marginal Cost

Price x Number Sold = Total Revenue

Price x Number Sold = Total RevenueTotal Revenue –

Total Cost =Profit/Loss

Total Revenue –Total Cost =Profit/Loss

Bean bags

Fixed Cost

Variable Cost

Total Cost (fixed cost + variable Cost)

Marginal Cost

Marginal Revenue

Total Revenue

Profit(TR-TC)

0 $36 0 36 0 24 0 -36

1 36 8 44 8 24 24 -20

2 36 12 48 4 24 48

3 36 15 51 3 24 72 21

4 36 20 56 24 96 40

5 36 27 63 7 120 57

6 36 36 72 9 24 144

7 36 48 84 12 24 168 84

8 36 99 15 24 192

9 36 82 118 19 24 216 98

10 106 24 24 240 98

11 36 136 30 24 264

12 36 173 209 37 24 288 79