1. Article: In the News at the Local Multiplex You own a movie theater. It’s a nice size. You are doing well and ready to expand. What is the advantage of adding screens rather than opening another theater. – Use same staff to collect tickets and run projectors – Use same page advertising – Use one set of bathrooms What is this called? (Students can use the word bank on p. 145) – ”Achieving economies of scale”

2. 5.3 Production and Cost

3. Production in the Short Run Firms earn profits by converting ___________, or inputs, into goods and services, or _________. Resources that cannot be varied are __________ resources (ex. size of buildings, equipment) Resources that can be changed quickly are ___________ resources (ex. labor) When considering the time required to change the quantity of resources, economists distinguish between the short run and long run. – In the short run at least one resource is fixed. – In the long run all resources can be varied. ________ _________ is the total output of a firm per period. _________ __________ is the change in total product resulting from a one unit change in a particular resource. (Other resources remaining constant.)

4. Increasing Returns Begin with one worker Add a second worker, and so on…. Variable Resources (laborers) Total Product (tons per day) Marginal Product 122 253 394 4123 5142 6151 Law of Diminishing Returns As more of a variable resource is added to fixed resources, marginal product eventually __________ and may become negative.

5. Cost in the Short Run A __________ cost is one that does not change ___________ costs change, or vary, with the amount produced ________ _______ is the sum of fixed costs + variable costs __________ ________ is the change in total cost resulting from a one-unit change in a resource. Marginal cost = change in total cost change in output

6. Marginal Cost Curve and Revenue Because of the increasing returns from labor, the marginal cost curve first slopes ________ (and then up). Supply is based on the marginal benefit that producers get from selling each additional unit of a good. The marginal benefit that producers get from supplying an additional unit is called marginal __________. In order for firm to produce in the short run, price must be high enough to ensure that total revenue covers total ________.

7. Production and Cost in the Long Run In the long run all resources and inputs can be varied. ___________________: – As a firm increases its size, or scale, its long run average costs decline. – A larger firm can often obtain larger, more efficient machinery and allows for greater specialization of labor. Diseconomies of scale: – However, coordination of more inputs or a larger workforce, or poor communications in larger organizations can lead to diseconomies of scale. __________weeds out the firms that grow too large.

8. Homework