Business Production Decisions

1
Business Production Decisions

• Productivity and Costs decisions
• Intro You make production decisions everyday
• Homework
• Input-3 hours Outputgood grade

2
Cost of Production

• The costs of production directly affect the
  amount of profit a business makes.
• Raw Materials
• Labor
• Capital Equipment
• Rent
• Utilities

3
Costs of Production

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

4
Costs of Production

• Variable CostsChanges as the level of output
  changes.
• Ex. Raw materials, wages,
• Total CostsThe sum of fixed and variable
  production costs for a business.
• TC FC VC

5
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

6
Making Decisions at the Margin

• Marginal ProductThe change in output generated
  by adding one more unit of input.
• Pizza5 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 MRPrice
• Marginal CostsThe additional costs of producing
  one more unit of output.
• MC VC (new output level)- VC (previous output
  level)

7
Making Decisions at the Margin

• Producers can maximize profit where
• MRMC

8
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?