 Understand the law of diminishing returns  Understand the the different types of cost  Understand the concept of revenue  Understand the concept of profit

Apple has now emerged as the second largest company in the world. Two decades ago was practically a nonentity. How do you think Apple economists have contributed to this success, and what advice could they continue to offer into the future? (Apple was ranked the most valuable company in 2012)

 In your groups, select a factory owner/data recorder.  Your task is to produce as many bracelets as possible with the provided space and resources. (In a given period of time) ▪ With 1 worker = Total Product? ▪ With 2 worker = Total Product? ▪ With 3 worker = Total Product? ▪ With 4 worker = Total Product? ▪ With 5 worker = Total Product?

 To what extent can production increase when only the amount of labor employed can change?

 States as additional units of a variableresource/input (labor) are added to a fixedresource/input (capital),  beyond a certain point the outputattributable to additional units of thevariable resource will decline.  With only a limited supply of technology attheir disposal, workers in a factory canonly increase their productivity to anextent.

 What does the law of diminishing returns state?

 States the relationship between inputs and outputs  Inputs – the factors of production classified as:  Land – all natural resources of the earth – not just ‘terra firma’! ▪Price paid to acquire land = Rent  Labour – all physical and mental human effort involved in production ▪Price paid to labour = Wages  Capital – buildings, machinery and equipment not used for its own sake but for the contribution it makes to production ▪Price paid for capital = Interest

InputsProcessOutput Land Labour Capital Product or service generated – value added

 Costs are classified as:  Fixed costs – costs that are not related directly to production – rent, rates, insurance costs, admin costs. They can change but not in relation to output

Variable Costs – costs directly related to variations in output. Raw materials primarily  Total Cost - the sum of all costs incurred in production  TC = FC + VC

 Average Cost – the cost per unit of output  AC = TC/Output

 Total revenue – the total amount received from selling a given output  TR = P x Q  Average Revenue – the average amount received from selling each unit  AR = TR / Q

 Profit = TR – TC  The reward for enterprise  Profits help in the process of directing resources to alternative uses in free markets  Relating price to costs helps a firm to assess profitability in production

 When the level of output produces and sells = cost to produce  TR – TC =0= Break even point  Break even level of output = TFC/(price per unit- VC per unit)  Average revenue per unit = TR / total unit sold  Profit (loss) per unit = AR – AC

Area of loss

 Example 1  If the fixed costs are $100 if the average variable cost is $2, and if the selling price is $2.50 per unit then:  a) the total cost of producing q units is given by the cost function ; C (q)= q  b) the revenue from selling q units is given by the revenue function ;R (q)= 2.5q  c) the profit from producing and selling q units is given by the profit function ▪ P(q)= R(q)- C(q) ▪ =2.5q-(100+2q) ▪ =0.5q-100

 d) the break even point is determined by solving the equation ▪ 2.5q = 100+2q ▪ 0.5q= 100 ▪ q=200  e) The average cost is ▪ C(q)/q=(100+2q)/q = 2+(100/q)

 A major airline carrier operating a scheduled (regular) service between London and New York analyses its carrying loads and spots that on the regular Wednesday evening flight, vacant seats are at their highest level of all the flights, amounting to an average of 45% of the plane.  What strategies might they adopt to attempt to fill those seats?  Hint: Think about the relationship between fixed costs, variable costs

 If a firm need to increase output quickly or temporarily ▪ Have pay overtime ▪ Make production more efficient ▪ More labor ▪ Motivate employees – bonus?  This can be achieved in the short run  Increasing (scale of production) significantly by expanding, purchasing new machinery hiring and buying new capital  This can be achieved in the long run

 Increasing return to scale = doubles all it’s inputs more than doubling it’s output  Diminishing return to scale = doubles all input and unable to double its output  Constant return to scale = doubles output and input

 Economies of Scale = if making cost savings from the increase in scale of production  Diseconomies of scale = if average cost of production rises as the produce more

 Cost savings by the way firms raise money  Selling shares  Borrowing money to buy machinery  Lower interest (for loans)

 Cost savings by the way they sell their product  Buy in bulk  Employ purchasing specialists and sales people

 Cost savings by method of production  Specialized workers and machinery  Research a faster method of production  Types of transport

 Cost savings by reducing the risk of fall in demand  Using many different suppliers  Diversification of goods

 Too many departments and managers= disagreements

 Disengagement of the workers  Strikes and disruptions