1. MAKING PRODUCT DECISIONS Economics, March 2011

2.  Remember: we are the supplier, making decisions about what to PRODUCE!

3. Review: what is productivity?

4.  Amount of goods and services produced per unit of input (how efficiently resources are being used in production)

5.  How to calculate productivity?  Step One: calculate total output

6. Marginal Product:  Change in output generated by adding one more unit of input. Labor InputTotal ProductMarginal Product 000 110 40 250 x 3110 Labor Input increases from 0 to 1, marginal product is 10, because 10

7. Law of Diminishing Returns  Effect that varying the level of an input has on total and marginal product  As more of one input is added to a fixed supply of other resources, productivity increases UP TO A POINT.  Eventually it will result in a negative marginal product.

8. 3 stages of production can be predicted by Law of DR:  Increasing marginal returns  Diminishing marginal returns  Negative marginal returns

9. Diminishing Marginal Returns  When output begins to increase at a diminished, or lower, rate  Ex: there is not enough machinery to keep the 12 th worker fully employed, thus total production increases, but at a lower rate than with the 11 th employee  On a graph it would start to level off

10. Negative Marginal Returns  Ex: the factory is overcrowded with workers and productivity decreases…

11. Costs of Production  Any goods and services used to make a product

12. Fixed Costs:  Store rent  Wear and tear on machines (repair costs… aging of machine is seen as a fixed cost)

13. Variable Costs  Change as the level of output changes  Raw materials, wages

14. Total Costs  At zero output… the total costs are equal to fixed costs

15. Marginal Costs  Additional costs for producing one more unit of output…  Fixed costs do not change as production level increases  So to determine marginal costs, look at variable

16. Calculating Marginal Costs Labor Input Total Product Marginal Product Fixed Costs Variable Costs Total Costs Marginal Costs 000$3,400$0$3,400- 118752003,4002,3655,7651.08 129851103,4002,5805,9801.95 131,000153,4002,7956,195X To increase tennis ball production from 985-1000 a day… Variable costs increase from $2,580-$2,795 Marginal cost is the additional cost (2795-2580=$215) divided by the number of additional ducks (1,000-985=15) $215 /15 = $14.33