1 Essential Question: Explain the goal of checking “Productivity;” define input and output; list and describe fixed costs, variable costs, and marginal costs. Making Production Decisions SECTION 3

2 Productivity and producers: Productivity is the process of maximizing the amount of output, while attempting to minimize the amount of input Producers check productivity because: They want to see how efficiently resources are being used. They want to ensure that there is as little waste as possible. Making Production Decisions SECTION 3

3 Input/Output and the law of diminishing marginal returns: Input- any resource (human/natural/capital) that is added Output- the quantity of products produced By increasing levels of input, output will increase. Eventually, adding input will result in lower output. This is the law of diminishing returns. Making Production Decisions SECTION 3

4 Total Product vs. Marginal Product: Total product- this is the total quantity of goods or services you produce within a given period of time Marginal Product- this is the change in total product that occurs when you add additional input (ex. Workers) Making Production Decisions SECTION 3

5 Increasing Returns/Decreasing Returns/Negative Returns: Increasing returns- means that as you add input, output increases as well Diminishing returns- means that as you add input, output increases, but by a smaller amount each time Negative returns- means that as you add input, output decreases Making Production Decisions SECTION 3

6 DO NOT COPY (P 87) Making Production Decisions SECTION 3

7 Production Costs: Fixed Costs- these are the costs that never change regardless of the quantity for total product- example rent for your factory Variable costs- these are the costs that change with the level of output- example material costs for each item, or # of workers. Making Production Decisions SECTION 3

8 Production Costs: Total Costs- The sum of adding Fixed Costs and Variable costs together. Once you know your total costs, you divide it by the total product to determine what each unit of output costs. Marginal Costs- the costs that occur to make one more total product. Making Production Decisions SECTION 3

9 The big picture: As a producer, you can have some control over costs Every time you add a cost, you must analyze whether that cost will add to your overall profit or subtract from it Making Production Decisions SECTION 3