[ 3.5 ] Costs of Production
Labor and Output
• How Many Workers to Hire?
• Marginal Product of Labor- change in output from
hiring one more worker
• Increasing Marginal Returns- increasing overall
output per worker
• Negative Marginal Returns decreasing overall
output per worker
As the stock of capital rises, the extra
output produced from an additional unit
of capital falls; this property is called
diminishing returns.
Labor and Output
Marginal product of labor is the change in output that results when a unit of labor is added. Analyze
Charts How does marginal product of labor change when a fourth worker is added?
Production Costs
• Fixed Costs- doesn’t change no matter how much of the
good is produced
• Property taxes
• Variable Costs- change depending on the amount
produced
• Labor
• Marginal Cost- additional cost of producing 1 extra unit
Production Costs
All producers need to understand their fixed, variable, and total costs. Explain Which categories of cost
would increase for a business that decided to extend its hours of operation?
Production Costs
Producers must identify costs and revenues to calculate profit—total revenues minus total costs. Apply
Concepts Why might this factory not seek the highest possible revenue?
Setting Output
•Profit =total revenue -total cost.
•A firm’s total revenue is the money the firm gets by selling
its product.
•Total revenue =the price of each good x the number of
goods sold.
•To find the level of output with the highest profit, we look
for the biggest gap between total revenue and total cost.
•The gap is greatest and profit is highest when the firm
makes 9 or 10 beanbags per hour. At this rate, the firm
can expect to make a profit.
Setting Output
• Marginal Revenue and Marginal Cost- additional
income from selling one more good or cost from
producing one more good
• Average cost= total cost/quantity produced
• The Shutdown Decision
• Revenue v. operating cost
Setting Output
This simple formula identifies the ideal level of output for producers. Synthesize What would a smart
producer do if marginal costs were lower than the market price?
Setting Output
Changes in price lead to a change in the ideal level of output. Analyze Graphs Based on this graph,
what should output be if the price fell to $20?
[ 3.6 ] Changes in Supply
Input Costs and Changes in Supply
Non-price determinants that alter supply shift the entire curve to the right or left. Check
Understanding How do supply shifts differ from changes in quantity supplied based on price?
S2
S1
S3
P
Resource Cost [wages & raw materials] [inverse]
58. Increase in wages (increases/decreases) supply.
Ex: A decrease in the price of computer chips
(increases/decreases) the supply of computers.
© 2007 Thomson South-Western
These are “things that can be supplied with the same resources”.
I only have
200 acres
P2
Broccoli
Corn
S
S2
S1
P
P1
QS1 QS2
Producers want to produce more of the good where price is increasing,
P1
Corn
Broccoli S
S1
S2
P
P2
QS2 QS1
or at least, where the price is not going down.
“Substitutes in production” [Remember, productive resources are scarce]
© 2007 Thomson South-Western
“Can’t wait till
milking time.”
This lowers production costs & increases “S”.
Ex: Suppose a new milking machine called
“The Invisible Hand” has a very soothing
effect on cows; cows find the new machine
so “udderly” delightful that they produce
30% more milk. This technological advance
will cause a shift to the right. 54
© 2007 Thomson South-Western
S3
S1
S2
P
56. If more firms enter an industry, the supply
curve will shift to the (left/right).
• When the American Basketball League
began play in 1968, there was a (bigger/smaller)
supply of basketball games each week.
60. A new professional football league will
(increase/decrease) the supply of football games.
© 2007 Thomson South-Western
[“INVERSE”]
S2
Oil Prices
expected P
to decrease
S1
S2
Oil Prices
expected
to increase
59. If oil producers expect future oil prices to decline,
they will (increase/decrease) current production.
If oil producers expect future oil prices to increase,
they will (increase/decrease) current production.
For example, if the cattle farmer expects higher prices for beef in the
future, he will send (more/less) cattle to market now.
He will keep them on the farm now and would send the cattle to the
market in the future when prices are expected to be higher.
© 2007 Thomson South-Western
S3
[Direct]
S1
S2
P
Free money from the government (subsidies)
induces suppliers to supply more.
If subsidies are taken away, then suppliers are
losing money and will decrease supply.
© 2007 Thomson South-Western
S3
I’m losing
profits.”
[Inverse]
S1
S2
P
If business have their taxes decreased,
it moves the supply curve to the right.
55. If business have their taxes increased,
it moves the supply curve to the (left/right).
© 2007 Thomson South-Western
Input Costs and Changes in Supply
Changes in input costs can affect the supply of several goods or services. Make Generalizations What
generalization can you make about the relationship between input costs and supply?
Government Policies and Changes in Supply
Many governments subsidize agriculture, though rates vary greatly from nation to nation. Generate
Explanations Why do you think subsidies change slightly from year to year?
Government Policies and Changes in Supply
In the United States, government subsidizes the building of these commercial aircraft. Draw
Conclusions Why might government subsidize this industry?
Other Non-Price Determinants That Create Changes in
Supply
This traffic jam in a Chinese city illustrates the recent increase in China’s use of petroleum. Economic
growth there has made cars affordable to millions of new drivers.
Other Non-Price Determinants That Create Changes in
Supply
Summarize How does expectation of future prices affect supply?
Deciding Where to Locate
•Firms locate close to input suppliers when inputs, such as
raw materials, are expensive to transport.
•They locate close to consumers when output is more costly
to transport.
Location near Markets
 The
cost of transporting goods to consumers is a
critical locational factor for three types of
industries: bulk-gaining, single-market, and
perishable.
Bulk-gaining Industries
A
bulk-gaining industry makes
something that gains volume or
weight during production.
 Soft-drink bottling
Location of Beer Breweries
Fig. 11-12: Beer brewing is a bulk-gaining industry that needs to be located near
consumers. Breweries of the two largest brewers are located near major
population centers.
Other Bulk-Gaining Industries
If
the fabricated product
occupies a much larger
volume than its individual
parts, then the cost of
shipping the final product
to consumers is likely to
be a critical factor.
Single-Market Manufacturers
 Single-market
manufacturers make products
sold primarily in one location, so they also
cluster near their markets.
 Manufacturers of fashion clothing then receive
large orders for certain garments to be
delivered in a short time.
 Consequently, high-style clothing
manufacturers concentrate around New York.
 Manufacturers demand rapid delivery of
specialized components, clasps, clips, pins,
and zippers.
 The specialized component manufacturers also
concentrate in NY
Perishable Products
Perishable-product
industries
must be located near their
markets. WHY?
Processors of fresh food into
frozen, canned, and preserved
products can locate far from
their customers.
The daily newspaper is an
example of a product other than
food that is highly perishable
WHY??
In European countries, national
The New York Times, Wall newspapers are printed in the
Street Journal, and USA
largest city during the evening
Today have moved in the
and delivered by train
direction of national
throughout the country
delivery.
Raw Materials and Markets
Ship, Rail, Truck, or Air?
Firms
seek the lowestcost mode of transport,
but the cheapest of the
four alternatives changes
with the distance that
goods are being sent.
Trucks are most often
used for short- distance
delivery and trains for
longer distances, ship
transport is attractive for
very long distances.
Weber's model

location depends on where the owner can
most minimize the costs of running it


transportation costs: site where transportation
costs are lowest is where it is least costly to bring
raw materials to production and also distribute
products to markets.
labor costs: cheap labor costs can make up for
high transportation costs
Deciding Where to Locate
Businesses of a particular industry often cluster near critical inputs. Express Ideas Clearly What inputs
do you think the cities and regions shown offer high-tech companies?