Unit 3: Costs of Production and Perfect Competition Copyright ACDC Leadership 2015

Production = Converting inputs into output Copyright ACDC Leadership 2015

Widget Production Simulation Copyright ACDC Leadership 2015

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 2015

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 2015

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

Inputs and Outputs Average Product = 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 Average Product = Total Product Units of Labor Copyright ACDC Leadership 2015

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 8 Copyright ACDC Leadership 2015

The Law of Diminishing Marginal Returns Too many cooks in the kitchen! 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! Copyright ACDC Leadership 2015

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

Graphing Production Copyright ACDC Leadership 2015

Three Stages of Returns Stage I: Increasing Marginal Returns MP rising. TP increasing at an increasing rate. Why? Specialization. Total Product Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor 12 Copyright ACDC Leadership 2015 Marginal Product

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 Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor 13 Copyright ACDC Leadership 2015 Marginal Product

Three Stages of Returns Stage III: Negative Marginal Returns MP is negative. TP decreasing. Workers get in each others way Total Product Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor Copyright ACDC Leadership 2015 Marginal Product

Remember quantity of workers goes on the x-axis. 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 (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) 1 10 2 25 3 45 4 60 5 70 6 75 7 8

Remember quantity of workers goes on the x-axis. 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 (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) - 1 10 2 25 15 3 45 20 4 60 5 70 6 75 7 8 -5

Remember quantity of workers goes on the x-axis. 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 (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) - 1 10 2 25 15 12.5 3 45 20 4 60 5 70 14 6 75 7 10.71 8 -5 8.75

Identify the three stages of returns Total Product(TP) PIZZAS # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) - 1 10 2 25 15 12.5 3 45 20 4 60 5 70 14 6 75 7 10.71 8 -5 8.75

Identify the three stages of returns Total Product(TP) PIZZAS # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) - 1 10 2 25 15 12.5 3 45 20 4 60 5 70 14 6 75 7 10.71 8 -5 8.75

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- 1st hour-large returns 2nd hour-less returns 3rd hour-small returns 4th 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 2015

Tony’s Hat Store Worksheet Copyright ACDC Leadership 2015