Costs of Production
Warm-up: When should we stop
• Marginal product is the change in total output
brought about by adding one more worker
• A farmer has 3 workers that pick about 300
apples a day in his/her apple orchard.
▫ If the farmer hires a 4th worker and now they all
pick 390 apples a day, then the marginal
product is 90 apples.
• Specialization is having a worker focus on one
particular aspect of production.
• Perhaps the 4th worker didn’t pick apples, but
focused on assisting the other 3
workers, allowing them to specialize in only
Examples of Specialization
• What examples of specialization can you think of
in a business?
• In an office: Manager, Janitor, Sales people,
Information desk, Secretary, etc…
• All of these people focus on one particular aspect
of work to allow their company to run more
Types of Returns
• Increasing returns occur when hiring new
workers cause marginal product to increase.
• Diminishing returns occur when hiring new
workers causes marginal products to decrease
Examples of Returns
• Examples of returns: open to page 139 and look at
the marginal product schedule
• At how many workers do increasing returns stop
and decreasing returns begin?
• At how many workers do we have the highest total
• Why might we not want to produce at the highest
Types of Costs
• Fixed Costs: stay the same
• Variable Costs: may change depending on
• Total Costs: Fixed costs plus variable costs
• Marginal Cost: the cost of one additional unit
Example of Costs
• How to calculate marginal cost?
▫ Divide the change in total cost by the change in
• Get into groups and on one separate sheet of
paper create examples of variable and fixed costs
Service Providers (Mechanic, Electrician)
• What should a business owner care about the
▫ How much they sell, how many people they
employ, how much they make, their total costs?
Earning the Highest Profit
• Marginal Revenue is the money made from the
sale of each additional unit of output.
• Marginal Revenue = Price
• Total Revenue is the total amount of money
received from selling a product.
• Total Revenue = P x Q
• This is the level of production at which a
business realizes the greatest amount of profit.
• Profit = total revenue – total cost.
• Typically when marginal revenue = marginal
Profit Role Play Activity
• Follow the scenario closely
• Each statement will give you some information
in order to fill out the production costs and