Business Production Decisions Productivity and Costs decisions Intro: You make production

decisions everyday: Homework

Input-3 hours Output—good grade

Cost of Production The costs of production directly affect

the amount of profit a business makes. Raw Materials Labor Capital Equipment Rent Utilities

Costs of Production Fixed Costs—Production costs

that do not change as the level of output changes. Ex. Rent, taxes, salaries

Costs of Production Variable Costs—Changes as the

level of output changes. Ex. Raw materials, wages, Total Costs—The sum of fixed and

variable production costs for a business.

TC = FC + VC

Making Decisions at the Margin Producers like to operate at maximum

efficiency. This means they want to MAXIMIZE PROFITS – Make the most

amount of revenue while incurring the least amount of costs

Profit= TR-TC How do they do this? By analyzing MARGINAL REVENUES

AND MARGINAL COSTS

Making Decisions at the Margin Marginal Product—The change in output

generated by adding one more unit of input. Pizza—5 people produce 100 pizzas/day Add 1 more person: 115 pizzas produced/day What was the marginal product? ______Marginal Revenues – The additional revenue

gained by selling one additional unit MR=PriceMarginal Costs—The additional costs of

producing one more unit of output. MC= VC (new output level)- VC (previous output level)

Making Decisions at the Margin Producers can maximize profit

where

MR=MC

Law of Diminishing Returns Describes the effect that varying

the level of an input has on total and marginal product. (Productivity increases up to a point, then the marginal product starts to fall.)

Back to the Homework example At what point does it stop

benefiting you to study more?