Chapter 5 section 2 supply costs


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Chapter 5 section 2 supply costs

  1. 1. Costs of Production Warm-up: When should we stop hiring employees?
  2. 2. Marginal Product • 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.
  3. 3. Specialization • 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 picking apples.
  4. 4. 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 efficiently
  5. 5. 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
  6. 6. 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 product? • Why might we not want to produce at the highest total product?
  7. 7. Types of Costs • Fixed Costs: stay the same • Variable Costs: may change depending on production • Total Costs: Fixed costs plus variable costs • Marginal Cost: the cost of one additional unit
  8. 8. Example of Costs • How to calculate marginal cost? ▫ Divide the change in total cost by the change in total product
  9. 9. Group Activity • Get into groups and on one separate sheet of paper create examples of variable and fixed costs for: ▫ ▫ ▫ ▫ Farmers Manufacturers Service Providers (Mechanic, Electrician) Retailers (Shops)
  10. 10. Warm-up • What should a business owner care about the most? ▫ How much they sell, how many people they employ, how much they make, their total costs?
  11. 11. 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
  12. 12. Profit-maximizing output • 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 cost
  13. 13. Profit Role Play Activity • Follow the scenario closely • Each statement will give you some information in order to fill out the production costs and revenues schedule.