[music] Very well. So now, let's add costs.
Let's make a simple assumption to keep the example simple enough that it's useful for
us to understand these dynamics. So again, we're going to use cooks, so
let's assume that Mike's have two inputs cooks which is a variable input, right?
So you have a variable input[SOUND] and that's a number of workers and in this
case, these are, those are cooks, right? And that it costs you the cost of that is
going to be $80[SOUND] per, per day or per worker, right?
Let's assume that each worker works a full day and this comes to about $10 an hour if
they work eight, eight hours in a day which is kind of what Mike's saying that
he pays his worker a little more than the, the minimum wage.
So, let's say, it's $80 per worker per day, right?
So, this is per worker per day. And then, let's, let's say, that the only
fixed input you have is the grill. The grill you have to use is, you cannot
increase it, because Mike took a, a huge, a large loan to pay for this.
And he's paying now the loan. And he will have to pay this loan
regardless if he produces any sandwiches of the, at all.
Even when he doesn't open the store, even if he stop, closes his business, he still
have to pay for his for his loan. So, this is, in sense, a fixed input.
And it will take him time to buy a new grill, a new kitchen, or whatever.
So, so, the fixed input here is the grill. And the cost of this, let's say, is $100
per day. So we, now that we have those two costs.
So, we're having the variable cost[SOUND] is going to be the workers, they have
times the wage they pay them, which is $80.
And the fixed cost,[SOUND] is not going to be dependent on the amount of sandwiches
you have, or the workers you have, it's always going to be $100.
With this information, you can complete the next three columns of the table, which
are how much are the variable costs every time they use a different number of
workers, how much is the fixed cost every time there are different number of
workers, and how much is the total cost every time they use a different number of
workers. So, here are the numbers.
So, when you have one worker, you're, when you have no workers, so the, the first one
is interesting, when you have no workers, you have some costs, which are the fixed
costs, you still have to pay $100. Now, when you have one worker, you have to
pay those $100 plus the cost of the, of that worker, which is $80, so, that will
be $180. When you have 3 workers 2 workers, you pay
the $100, again, fixed cost doesn't depend on the number of workers.
And you pay 2 workers for $80 each, that's $160, so that's $260, the total cost.
When you have 3 workers, it costs you $340 total, when you have 4, it costs you $420,
when you have 5, it's $500, and when you have 6, the total cost is $580.
And again, the total costs,[SOUND] let's call that TC, are going to be equal to the
variable costs and the fixed costs, okay? And now, what we're going to do is we're
going to put that information in a, in a diagram because the reason we're doing
this is it's easier to see patterns in diagrams.
So let's put it in this way. Let's now graph the total cost, right, in
dollar terms, against the number of sandwiches you make, against the output.
So, if you grab that, you see that what you end up is with a shape with a curve,
that is kind of like shaped like this, right?
It, the cost increased by, by a little bit at the beginning but then eventually, they
start shooting up dramatically and start increasing dramatically when you have
three or four or five workers. So, one thing we call this a total cost
curve. One thing that we can ask ourselves, is
why does this curve has a shape? Well, I think most of you already figured
this out. It probably has to do with the fact that
you're paying your workers with the same amount of money, but there, every time you
hire more and more, they bring in less and less.
So furthermore, we can see that, that if you remember the way we graph the total
product curve was the number of the workers here in the horizontal axis and
the output in the vertical axis. And what we had is a curve that was like
this. So, what we're doing here is we're taking
this Q, we're putting in the horizontal axis, and we're taking their workers,
we're multiplying by 80, added 100, and we put it in this axis.
So, what you end up with is, in essence, what we're doing is we're switching the
axis. It's a curve that is the mirror image of
the total product curve. The total cost curve is a mirror image of
the total product curve. And if the slope of this curve was big,
was due to the marginal product of labor, then the slope of this curve is also going
to be driven by the marginal product of labor.
In fact, the slope of this curve is called the marginal cost of production, and it
tells you how much your production, the cost of production go up every time you
add one more worker. And it has a very interesting application,
a very important application. So, we're going to get more in-depth into
it in the next section. [music] Produced by OCE Atlas Digital
Media at the University of Illinois, Urbana-Champaign.
Dr. José J. Vázquez-CognetClinical Professor
