Unit 3 Production Costs and Perfect Competition Copyright

Unit 3: Production, Costs, and Perfect Competition Copyright ACDC Leadership 2019 1

Topic 3. 1 The Production Function Copyright ACDC Leadership 2019

Copyright ACDC Leadership 2019 4

Widget Production Simulation Copyright ACDC Leadership 2019

Production = Converting inputs into output Copyright ACDC Leadership 2019

Production Simulation Overview • • The class will be divided into two firms. There will be several rounds in which each firm will produce chains out of paper. • Each round last exactly 1 minute • Each firm is going to hire one more worker at the start of each round. Resources • 1 stapler, 1 scissors, 1 table, and plenty of staples and paper Rules • Workers cannot stockpile slips of paper. No extras • Workers cannot cut more than one paper at a time • Workers can only add links to one side of the chain • Each link must pass inspection • If links don’t meet specifications they won’t count Responsibilities • The manager will hire the workers. • The inspector will check to make sure each product is made to specifications Copyright ACDC Leadership 2019

Production Simulation Step 1: Cut paper down the middle into two piece Step 2: Fold piece down the middle Step 3: Wrap ends around and staple Step 4: Add more links to one end Copyright ACDC Leadership 2019

Fill out this chart based on your firm’s production # of Workers (Input) # of Links (Output) Marginal Product 0 1 2 3 4 5 6 Copyright ACDC Leadership 2019 10

Inputs and Outputs • To earn profit, firms must make products (output) • Inputs are the resources used to make outputs. • Input resources are also called FACTORS. • Total Physical Product (TP)- total output or quantity produced • Marginal Product (MP)- the additional output generated by additional inputs (workers). Marginal Product = Change in Total Product Change in Inputs • Average Product (AP)- the output per unit of input Total Product Average Product = Copyright ACDC Leadership 2019 Units of Labor 11

Fixed vs. Variable • Fixed Resources- Resources that don’t change with the quantity produced – Ex: Table, scissors, and stapler • Variable Resources- Resources that do change with the quantity produced – Ex: Workers, paper, and staples Identify three fixed resources and three variable resources for a pizza restaurant Copyright ACDC Leadership 2019 12

Production Analysis • What happens to marginal product as you hire more workers? • Why does this happens? The Law of Diminishing Marginal Returns As variable resources (workers) are added to fixed resources (ovens, machinery, tool, etc. ), the additional output produced from each additional worker will eventually fall. Too many cooks in the kitchen! 13 Copyright ACDC Leadership 2019

Notice that as you hire more workers the additional links each additional worker creates begins to decrease This is because of the fixed resources and the Law of Diminishing Marginal Returns Copyright ACDC Leadership 2019 14

Graphing Production Copyright ACDC Leadership 2019 15

Three Stages of Returns Stage I: Increasing Marginal Returns MP rising. TP increasing at an increasing rate. Why? Specialization. Total Product Quantity of Labor Marginal and Average Product Copyright ACDC Leadership 2019 Average Product Marginal Product Quantity of Labor 16

Three Stages of Returns Stage II: Decreasing Marginal Returns MP Falling. TP increasing at a decreasing rate. Why? Fixed Resources. Each worker adds less and less. Total Product Quantity of Labor Marginal and Average Product Copyright ACDC Leadership 2019 Average Product Marginal Product Quantity of Labor 17

Three Stages of Returns Stage III: Negative Marginal Returns MP is negative. TP decreasing. Workers get in each other's way Total Product Quantity of Labor Marginal and Average Product Copyright ACDC Leadership 2019 Average Product Marginal Product Quantity of Labor 18

With your partner calculate MP and AP then discuss what the graphs for TP, MP, and AP look like. Remember quantity of workers goes on the x-axis. # of Workers Total Product(TP) Marginal PIZZAS Product(MP) (Input) 0 1 2 3 4 5 6 7 8 Copyright ACDC Leadership 2019 0 10 25 45 60 70 75 75 70 Average Product(AP) 19

With your partner calculate MP and AP then discuss what the graphs for TP, MP, and AP look like. Remember quantity of workers goes on the x-axis. # of Workers Total Product(TP) Marginal PIZZAS Product(MP) (Input) 0 1 2 3 4 5 6 7 8 Copyright ACDC Leadership 2019 0 10 25 45 60 70 75 75 70 - Average Product(AP) - 10 15 20 15 10 5 0 -5 20

With your partner calculate MP and AP then discuss what the graphs for TP, MP, and AP look like. Remember quantity of workers goes on the x-axis. # of Workers Total Product(TP) Marginal PIZZAS Product(MP) (Input) 0 1 2 3 4 5 6 7 8 Copyright ACDC Leadership 2019 0 10 25 45 60 70 75 75 70 Average Product(AP) - - 10 10 15 12. 5 20 15 15 15 10 14 5 12. 5 0 10. 71 -5 8. 75 21

Identify the three stages of returns # of Workers Total Product(TP) Marginal PIZZAS Product(MP) (Input) 0 1 2 3 4 5 6 7 8 Copyright ACDC Leadership 2019 0 10 25 45 60 70 75 75 70 Average Product(AP) - - 10 10 15 12. 5 20 15 15 15 10 14 5 12. 5 0 10. 71 -5 8. 75 22

Identify the three stages of returns # of Workers Total Product(TP) Marginal PIZZAS Product(MP) (Input) 0 1 2 3 4 5 6 7 8 Copyright ACDC Leadership 2019 0 10 25 45 60 70 75 75 70 Average Product(AP) - - 10 10 15 12. 5 20 15 15 15 10 14 5 12. 5 0 10. 71 -5 8. 75 23

More Examples of the Law of Diminishing Marginal Returns Example #1: Learning curve when studying for an exam Fixed Resources-Amount of class time, textbook, etc. Variable Resources-Study time at home Marginal return▪ 1 st hour-large returns ▪ 2 nd hour-less returns ▪ 3 rd hour-small returns ▪ 4 th hour- negative returns (tired and confused) Example #2: A Farmer has fixed resource of 8 acres planted of corn. If he doesn’t clear weeds he will get 30 bushels. If he clears weeds once he will get 50 bushels. Twice -57, Thrice-60. Additional returns diminishes each time. Copyright ACDC Leadership 2019 24

2008 Audit Exam Copyright ACDC Leadership 2019

2008 Audit Exam Copyright ACDC Leadership 2019

2008 Audit Exam Copyright ACDC Leadership 2019

Diminishing Returns in Sports Read the linked article and use the concept of diminishing returns to evaluate the writer's argument. Did the Warriors experience diminishing marginal returns? What would increasing returns look like in basketball? What about negative returns? Copyright ACDC Leadership 2019 28