Chapter 5 Section 2

Marginal Product of Labor
◦ The change in output from hiring one additional
unit of labor

Increasing Marginal Returns
◦ Workers increase, marginal production of labor
increases

Decreasing Marginal Returns
◦ Workers increase, marginal production of labor
decreases
Labor (# of workers)
Output (beanbags per
hour)
Marginal Product of
Labor
0
0
-
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
-1

Fixed Costs (FC)
◦ A cost that does not change, no matter how much
of a good is produced
◦ Example: building, equipment, property taxes,
salary of employees

Variable Costs (VC)
◦ A cost that rises or falls depending on the quantity
produced
◦ Example: raw material; wages of employees; utility
bills

Total Cost (TC)
◦ The sum of fixed costs plus variable costs

Marginal Cost (MC)
◦ Additional cost of producing one more unit

Marginal Revenue (MR) and Marginal Cost
(MC)
◦ Marginal Revenue
 The additional income from selling on more unit of a
good
◦ BEST level of output is where Marginal Revenue is
equal to Marginal Cost
◦ MR=MC

Responding to Price Changes
◦ If price of good changes, production will change
accordingly
◦ If a goods price changes from $10 to $20, the firm
would increase production so the marginal cost
would equal the higher price

The Shutdown Decision
◦ Firm produces at the most profitable level MR=MC
◦ Market price is so low that total revenue is less than
total cost
◦ To shut down or not
 Shutdown if Total Revenue (TR) is less than Variable
Cost (VC)
 Keep running is TR > VC
 Why???????????



MC = New TC – Previous TC
TR = MR x amount of good
Profit = TR - TC