2. MARGINAL CHANGES PRODUCTION FUNCTION INCENTIVES

3. INTRODUCTION DECISIONS IN EVERYDAY'S LIFE ARE NOT ALWAYS CLEAR BUT THEY HAVE SHADES MEANING MARGINAL CHANGES ( WHICH IS THE THIRD PRINCIPAL OF ECONOMICS) IS THE TERM USED TO DESCRIBE SMALL INCREMENTAL ADJUSTMENTS TO AN EXISTING PLAN OF ACTION

4. BY COMPARING THE MARGINAL BENEFITS AND MARGINAL COSTS YOU CAN EVALUATE WHAT IS THE MOST USEFUL OPTION EXAMPLE: IF WE CONSIDER THE OWNER OF A CINEMA DECIDING HOW MUCH TO CHARGE THE CLIENTS WHO BUY LAST MINUTE TICKETS OWNER COULD GROW ITS PROFIT BY THINKING AT THE MARGIN

5. IF THE SHOW IS ABOUT TO BEGIN WITH 10 EMPTY SEATS AND SOMEONE WANTS TO BUY A LAST MINUTE TICKET AT THE PRICE OF € 8,00, THE OWNER SHOULD SELL IT TO HIM, BECAUSE THE COST OF ADDING ONE MORE CLIENT IS TINY THE MARGINAL COST IS JUST THE COST OF A BAG OF POPCORN, THAT IS INCLUDED IN THE PRICE OF THE TICKET, THAT THE EXTRA CLIENT WILL CONSUME AS LONG AS THE EXTRA CLIENT PAYS MORE THAN THE MARGINAL COST, SELLING HIM THE TICKET WILL BE WORTHWILE.

6. PEOPLE RESPOND TO INCENTIVES INCENTIVES HAVE AN ESSENTIAL IMPORTANCE FOR PUBLIC POLICY MAKERS BECAUSE MANY POLICIES CHANGE THE COSTS OR BENEFITS THAT PEOPLE FACE AND ALTER THEIR BEHAVIOUR EXAMPLE: THE POLICYMAKERS HAVE MADE A LAW REQUIRING COMPULSORY AIRBAGS IN CARS THIS LAW CHANGES THE BEHAVIOUR BECAUSE PEOPLE DRIVE THEIR CAR MORE CAREFULLY AND SLOWLY BUT THIS IS COSTLY BECAUSE IT TAKES MORE ENERGY AND TIME FROM THE DRIVER

7. RATIONAL PEOPLE COMPARE THE MARGINAL BENEFIT TO THE MARGINAL COST WE HAVE TO CONSIDER HOW THIS LAW CHANGES THE WAY PEOPLE CALCULATE COST AND BENEFIT PEOPLE RESPOND TO AIRBAGS DRIVING FASTER AND THIS CAUSES MORE ACCIDENTS AND INCREASES THE NUMBER OF INJURED PEDESTRIANS

8. I WILL TAKE THE EXAMPLE OF JOHNS' SWEET FACTORY THE OWNER CAN MODIFY THE QUANTITY OF SWEETS PRODUCED ONLY BY CHANGING THE NUMBER OF WORKERS WE CAN SEE HOW THE QUANTITY OF SWEETS JOHNS' FACTORY PRODUCES PER HOUR DEPENDING ON THE NUMBER OF WORKERS IN THE FIGURE 1

9. output (quantity of cookies produced per hours ) Number of workers marginal product of labor cost of workers total cost of inputs(cost of factory +cost of workers) 012012 0 40 70 40 30 cost of factory 30 $ 30 0 $ 10 20 30 $ 40 50

10. 012 10 20 30 40 50 60 70 Quantity of Outpunt (cookies Per Hour)

11. MEANING PRODUCTION FUNCTION IS THE RELATIONSHIP BETWEEN THE QUANTITY OF INPUTS (WORKERS) AND THE QUANTITY OF OUTPUT ( SWEETS) TO UNDERSTAND HOW A COMPANY DECIDE HOW MANY WORKERS TO HIRE AND HOW MUCH OUTPUT TO PRODUCE, WE HAVE TO THINK ABOUT THE THIRD PRINCIPLE OF ECONOMICS, RATIONAL PEOPLE THINK AT THE MARGIN

12. output (quantity of cookies produced per hours ) Number of workers marginal product of labor cost of workers total cost of inputs(cost of factory +cost of workers) 012012 0 40 70 40 30 cost of factory 30 $ 30 0 $ 10 20 30 $ 40 50

13. YOU CAN SEE THAT AS THE NUMBER OF WORKERS INCREASES THE MARGINAL PRODUCT DECLINES, THE SO CALLED " DIMINISHING MARGINAL PRODUCT“ THE PRODUCTION FUNCTION SLOPE (RISE OVER RUN) SHOWS THE CHANGE IN JOHNS' OUTPUT OF SWEETS ( RISE) FOR EACH INPUT (RUN)