Supply Theory of Production

- Theory of Production deals with the relationship between factors of production and the output of goods and services -short run v. long run – if a business hires additional labor to boost production, this is short run. If they build a new factory, this is long run -Law of Variable Proportions – the idea that in the short run, output will change as input is varied while others are held constant; Ex: sauce on pasta or butter on bread; -can change multiple variables, but it hard to track the impact of an individual variable Production Function – concept that describes the relationship between changes in output to different amounts of a single input while other inputs are constant; Ex: adding workers in a factory but keeping everything else the same

- Total product = total output; as more workers are added, total product rises; more workers = more specialization - Eventually, after a certain number of workers are added, production slows. Total product still increases but at a slower rate; Finally, too many workers can result in the decrease of total product; Why? - Marginal product – the change in product due to the addition of one or more variable input - Stages of production – shows increasing returns (Stage 1), diminishing returns (Stage 2), and negative returns (Stage 3)

Production, Costs, Revenues, Profit Production ScheduleCostsRevenuesProfit Regions of Productio n Number of workers Total Product Marginal Product Total Fixed Costs Total Variable Costs Total Costs Marginal Costs Total Revenue Marginal Revenue Total Profit Stage 1000$50$0$ $ $ $ $ , Stage ,650151, ,935151, ,070151, ,160151, ,220151,270 Stage ,175151, ,

Measure of Cost -Fixed cost – The cost that a business incurs even if output is zero, a little, or a large amount; includes interest charges, taxes, depreciation, executive pay; Same as overhead -Variable Cost – cost that changes when the business rate of operation or output changes; Example: labor, raw materials, shipping charges; these can change as supply changes; If you don’t want to produce a large supply anymore, labor costs will change because people may be laid off. -Total cost – Fixed cost and variable costs added together; -Marginal cost- extra cost when a business produces an additional unit of a product; Example: calculate change in total costs from when you had 0 workers to 1 worker ($140- $50 = $90). Divide that by the number by the marginal product. You will get marginal cost. -Marginal Revenue – the extra revenue associated with the production and sale of one additional unit of output -Total Revenue – the number of units sold multiplied by average price per unit Profit – Total revenue minus total costs = profit

Cost, Revenue, and Profit Maximization  Self Service Gas Station – What hours of operation would be beneficial?  Internet Store – How could this be beneficial for a supplier over a department store?

Who is making more money Honda or Toyota? How would you know? al What type of business would you own? Why? al