Production= Converting inputs into output Widget Production Simulation Production= Converting inputs into output

Analyzing Production Lets look at an example to show the relationship between inputs and outputs

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 2 minutes Each firm is going to hire one more worker at the start of each round. Resources 1 stapler, 1 scissors, 2 desks, 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

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

Production Simulation Complete the chart for your firm: Number of Workers (inputs) Total Product (output) Marginal Product 1 2 3 4 5 6 7

Simulation Debrief Key Questions: What happened to the number on links produced as more workers were hired? Why can the second worker generate more additional links than one worker working alone? Why did the additional output for each worker eventually start to fall or even go negative? What would happen to total output if every student in the room tried to make links given the limited resources?

Resources (Factors of Production) Fixed Resources- Resources that DON’T change with the amount produced What were the fixed resources? Stapler, scissors, and table Variable Resources- Resources that DO change as more or less is produced What were the variable resources? Workers, paper, and staples Practice - Identify 3 fixed and 3 variable resources for a pizza restaurant

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

The Law of Diminishing Marginal Returns Too many cooks in the kitchen! Production Analysis What happens to the Total Product as you hire more workers? What happens to marginal product as you hire more workers? Why does this happen? The Law of Diminishing Marginal Returns As variable resources (workers) are added to fixed resources (machinery, tool, etc.), the additional output produced from each new worker will eventually fall. Too many cooks in the kitchen!

Graphing Production Short Run Production Worksheet

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 11 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 12 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

What are the three stages of returns? Total Product(TP) PIZZAS Can you identify each? # 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 Increasing Marginal Returns Decreasing Marginal Returns Negative Marginal Returns

Law of Diminishing Returns 10 20 30 Total Product, TP 1 2 3 4 5 6 7 8 9 TP 20 10 Marginal Product, MP 1 2 3 4 5 6 7 8 9 Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns AP MP 8-19

Tony’s Hat Store Worksheet Copyright ACDC Leadership 2015

*Note to teacher* After you complete this activity, create this poster with the links and put it on the wall. This poster includes yellow links to show marginal product. It shows the relationship between inputs and outputs and will be extremely beneficial as you teach production costs.