 Describe inputs and outputs  Explain the principle of diminishing returns  Describe the 3 stages of the production function  Describe the amount of inputs that will return the maximum profit  Determine the opportunity cost

 Materials that determine fixed and variable costs

 The different results of varying the amount of input used in production

 The basic relationship that allows analysis of an input and an output is called a production function  See Example p. 5-2 to 5-4

 As an input is added in production, the output will increase at an increasing rate then at a decreasing rate and finally decline  Fig 1 p. 5-4

 Total Product (TP) › The production (output) that can be achieved with the various levels of input. › Example: We apply one unit of fertilizer and we get an amount of output, when plotted this gives the TP curve.  Average Product (AP) › Total Product/Amount of Input  Marginal Product (MP) › Change in total product for a change in input  Examples- Table 2 Columns 1-4 p. 5-5

1. An increasing average return for each added unit of input. › Average product (AP)= Total Yield (TP)/ the Number of Units of the Variable Input 2. Begins when Marginal Product (MP)=Average Product (AP) › Diminishing returns begin to develop in Stage 2 3. Begins when Marginal Product (MP) becomes 0. › In this stage the total product actually decreases if the input increases.

 Maximum profit will be obtained if you add the variable input to the point where the value of the marginal product (VMP) equals the price of the added input  VMP=Price of Input  VMP is found by multiplying Marginal Product (MP) by the price of the product › MP x Price of Product= VMP

 The cost of using a resource one way based on the return that could be obtained from using it in the best alternative way.  Example: p. 5-6

 Inputs have individual and combined impacts on the final product

 Graphics  Mathematical  p. 5-9

 Used in the graphical least cost ration method  Occurs when all points are connected into a line segment  Fig 4 p. 5-9—the line shows the combination of soybean oil meal and corn for 100 pounds of gain for 60 lb hogs

 Take a given amount of money and divide by the cost per pound of a feedstuff to get the quantity of feed that amount of money will purchase. Do the same for other feedstuffs, connect points A and B and this is the same cost line  See p. 5-9, 5-10 (fig 6)

 Found by moving the same cost line parallel to itself until it touches the same production line at one point only.  Point C fig 6 p  Mathematical Formula Change in Feed A/Change in Feed B= Price of Feed B/Price of Feed A

1. Determine the rate that one input substitutes for another. This is the marginal rate of substitution. 2. Compute the price ration. This should be the price at the point of use. 3. Find the ration for which the two rations are equal. This is the least-cost combination of the two inputs.

 Can provide price and/or yield targets that can be beneficial in planning

 When used in enterprise budgets can be useful when completing the financial analysis  Table 3/Table C---Crop Insurance

 Summary p  Assignment complete review questions 1-9.