BellringerUse a full sheet of paper

1. Write down all the costs associated with running this hotdog cart

2. Which costs would change based on our hours of operation?

WE WILL TAKE SOME NOTES TODAY

“the margin”

• Additional unit of production

Two volunteers

• Two marsh mellow eaters

• Graph marginal utility

• Law of diminishing marginal returns

• Eventually marginal benefits will decrease

Application to students?

Application to government?

Application to stuff you buy

Application to partiers

Application to business?

• Costs!

Profit and Costs• Profit = Revenue – Total Costs• In other words, profit is all the money you take in,

less the money it cost you to make it• For example:

I buy 10 shares of Office Max Stock at $3/share. If I sell it today, what was my profit?

P = Revenue ($?) – Costs ($150)

Profit = $?

This is important for producers to think about, why?

So to increase our profit we must either, increase revenue, OR cut our costs.

Video clip

• Watch for costs that change

• Watch for costs that don’t

Let’s think more specifically about costs

• Fixed Costs = costs that do not change based on production

• Examples: capital goods, tools, buildings, menus

Coke factory in Atlanta, Georgia

Special fixed costs

• “Entry costs” – costs to start up the business

Business with lowEntry costs

Perfect competition

Business with very highEntry costs

OligopolyMonopoly

Costs we can change in the short run

Variable costs = costs that change based on production

The more I produce, the more cost I will incur.

If I don’t produce at all, my variable costs will be 0

For example: labor, electricity, raw materials

Nike factory in China

Michael Jordan visiting Nike Factory in 1999 Why produce in China?

Marginal Costs

• Marginal costs = the cost of producing 1 additional unit

• For example:

• Why helpful?

Widgets

01234

FC

11111

VC

06

111622

MC

X

Total Costs

• Total Costs = fixed + variable costsFor example:

Widgets

01234

FC

11111

VC

01235

TC

12346

MC

X1112

Revenue

02468

Assume Widgets price

$2/eachProfit

-10122

Brainstorm Costs

• Hair salon– Fixed Costs:– Variable Costs:

• DJ Music Company:– Fixed Costs:– Variable Costs:

Practice one, Assume the price of Filters = $10

Filters

0123456789

10

FC

25

VC

010162022242732405475

TC MC

X

Revenue Profit

3. How many filters does this firm need to make in order to make a profit?

4. How many filtersshould the firm produce?

Practice one, Assume the price of Filters = $10

Filters /day

0123456789

10

FC

2525252525252525252525

VC

010162022242732405475

TC

25354145474952576579

100

MC

X106422358

1421

Revenue

0102030405060708090

100

Profit

How many filtersshould the firm produce?

-25-25-21-15-718

1315110

8, because the profit is 15, the highest. Profit Maximization point

Let’s start a pillow factory!

1. How many workers will you hire and why?2. What are your variable costs?3. What are your fixed costs?4. Why might it not make economic sense to hire 70

workers? 5. Consider marginal benefits of adding more workers,

where is the marginal product of labor the highest? 6. What might explain the difference production from 50

to 70 workers?7. Tegucigalpa has 14 other low skilled factories, paying

an average wage of $1.75/hour. How much will you pay your workers?

8. What is your advantage over American pillow manufacturers? (cutting costs or increasing revenues?)

Workers Output per hour

0 010 520 1130 1840 2450 2960 2770 24

Your group of managers needs to start a pillow making firm. You purchased a building for $100,000 in Honduras. You also purchased equipment worth $25,000 for your workers to use. Your labor needs to perform the following tasks: cutting fabric, sewing, stuffing, quality control and boxing. You also need to hire a supervisor to watch the workers.