CH. 7, Sec. 2 Production Drives Supply

 Production is what makes it possible to meet consumer demand.  There is an opportunity cost in earning money as well…most people would rather play games, skate, watch TV, vacation, some other activity than work.  Oppt. Cost of working = less fun activities

 Four Factors of Production= anything used to produce a g/s: 1) LAND 2) LABOR 3) CAPITAL 4) ENTREPRENEURSHIP

 Land = basic natural resource; examples: a farm, coal field, orange orchard, natural gas field  Labor = human factor of production—each of us is free to pick which field would be best for us; examples: teacher, truck driver, baseball player, nurse

 Capital = previously produced g/s; examples: a sewing machine used in making jeans is formed of capital, office buildings, schools, factories, tractors = all are made of different forms of capital.

 Entrepreneurship = managers and risk takers (owners). Few people can organize, direct, and control other people and resources efficiently and productively—they are willing to be risky in order to make a business successful!

 In a free enterprise economy, like USA, most factors of production are owned by individuals.  You can use your labor and other factors of prod. to produce g/s in exchange for monetary and non- monetary rewards.

 Production takes place as owners of the factors of production allocate their land, labor, capital, and entrepreneurship so that they make maximum profit!  Profit is the main motive and very important in guiding the production of g/s!

 Measuring Production = businesses measure production or how much is supplied by time periods. --they keep track yearly, monthly, weekly, or hourly

 Counting Units vs. Dollars: Using units instead of dollars makes it easier to compare sales over time.  Look at pg. 161 Fig. 7-6 for example

 Looking at the dollar rate is misleading because it shows that more money is being earned. What is doesn’t show is that less units are being sold. There is potential to make more profit. You must look at the units over a period of time!

 Total Product = the units of output produced in a given time period.  Output is the FINAL PRODUCT  Average Product = the number of units of output produced per unit of input Units of Output Average Product = Units of Input

 Think of “input” as one unit of workday EX: Lumin Company makes lamps. 1 unit of input = 1 workday During 6 years—88 people worked 5 days a week for 50 weeks a year.

Labor units in years: 88workers x 5 days/wk x 50wks/yr = 22,000 workdays _____________________________ 22,000 = total input in 6 th year 124,727 = # of lamps produced in 6 th year

Average Product = 124,727/22,000 =5.669 lamps per day Which means that each worker produced almost 6 lamps per day.

 Marginal Product = the amount that total product increases or decreases as a result of adding one additional unit of input. Change in Output Marginal Product =Change in Input

 Diminishing Marginal Product = the principle that as more of one input is added to a fixed amount of other inputs, the marginal product decreases.  In other words, output increases less rapidly as additional units of input are used. Too much crap makes a cluster; therefore, less production!

Number of Employees Total Product Marginal Product Δ OUTPUT Δ INPUT ÷10 = ÷ 10 = ÷ 10= ÷ 10 = -2

 Long Run(LR) = a period during which the amounts of all inputs can be changed. (not based on the calendar either)  EX: a power company might need ten years or more to increase plant capacity

 Scales of Production = the overall level of use of all factors of production.  When all units increase, the scale of production increases.  If all increase then the diminishing marginal product is no longer valid  EX: if Lights Unlimited kept enlarging its store, more employees could be hired without a problem of overcrowding.

 Returns to Scale = the relationship between changes in the scale of production and the corresponding change in the amount of output.

 Some products are more efficiently produced on a large scale—like cars, steel and home appliances= increasing returns to scale. This means the levels of output increase more rapidly than the use of inputs.

 EX: if the use of inputs double then output will more than double.  Constant Return to Scales = 20% more input causes 20% more output

 Decreasing Returns to Scale = 50% increase in all inputs but only 30% increase in output.