MAKING PRODUCT DECISIONS Economics, March 2011

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

Review: what is productivity?

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

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

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

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.

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

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

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

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

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

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

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

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

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