1. Economics Bookmaking: A Simulation in Costs and Productivity When firms produce goods and services they attempt maximize their profits. One of the key ways to maximize these profits is to increase productivity and lower costs. With this simulation you and your teammates (the company) will manufacture books and then examine how your production techniques and outside influences affect the cost of producing the books and your productivity. As the simulation proceeds you will need to fill out the table shown below. Below the table is information which explains key terms and helps to fill in the table. Your goal as a company will be to produce as many books as you can in 3 minutes.

2. Bookmaking Worksheet Round 1Round 2Round 3Round 4Round 5 1. Cost of Materials 2. Wages 3. Capital Expense 4. Total Variable Cost 5. Total Fixed Cost 6. Total Cost 7. Average Variable Cost 8. Average Fixed Cost 9. Average Total Cost 10. Total Product 11. Average Product 12. Productivity

3. Line 1- Cost of Materials (paper, ink, staples) - $.25 per book x Total Product (Line 10). This is the cost of your natural resources. Line 2- Wages- $1.00 per worker x number of workers. This is the cost of your human resources. Line 3- Capital Expense- This is the cost of your machinery, your capital resources. $.50 per pen.

4. Bookmaking Worksheet Round 1Round 2Round 3Round 4Round 5 1. Cost of Materials 2. Wages 3. Capital Expense 4. Total Variable Cost 5. Total Fixed Cost 6. Total Cost 7. Average Variable Cost 8. Average Fixed Cost 9. Average Total Cost 10. Total Product 11. Average Product 12. Productivity

5. Line 4- Total Variable Cost (TVC) - Costs that vary with output. Add lines 1, 2, and 3. Line 5- Total Fixed Cost (TFC) - Costs that do not vary with output. Your factory (your desk/ table) cost $2.00 total. Your factory is another capital resource. Line 6- Total Cost (TC) = TVC + TFC. Line 4 + Line 5.

6. Bookmaking Worksheet Round 1Round 2Round 3Round 4Round 5 1. Cost of Materials 2. Wages 3. Capital Expense 4. Total Variable Cost 5. Total Fixed Cost 6. Total Cost 7. Average Variable Cost 8. Average Fixed Cost 9. Average Total Cost 10. Total Product 11. Average Product 12. Productivity

7. Line 7- Average Variable Cost = TVC ÷ Total Product (output). Line 4 ÷ Line 10. Line 8- Average Fixed Cost = TFC ÷ Total Product. Line 5 ÷ Line 10. Line 9- Average Total Cost = TC ÷ Total Product OR AVC + AFC. Line 6 ÷ Line 10 OR Line 7 + Line 8.

8. Bookmaking Worksheet Round 1Round 2Round 3Round 4Round 5 1. Cost of Materials 2. Wages 3. Capital Expense 4. Total Variable Cost 5. Total Fixed Cost 6. Total Cost 7. Average Variable Cost 8. Average Fixed Cost 9. Average Total Cost 10. Total Product 11. Average Product 12. Productivity

9. Line 10- Total Product (TP) - The number of books produced. This is your company’s output or production. Line 11- Average Product = TP ÷ number of workers. This is the number of books produced by each worker. Line 12- Productivity (Output per minute worked) = TP ÷ total number of minutes worked (number of workers x 3 minutes). This is the number of books produced each minute by each worker.

10. Debrief Questions 1.What happened to your total variable costs (Line 4) and your total costs (Line 6) as the simulation progressed? Why? TVC and TC both increased. As you made more books you used more materials/ natural resources like paper, staples, and ink and these all cost more.

11. 2. What happened to your total fixed costs (Line 5) as the simulation progressed? Why? TFC stayed the same. The cost of your desk/table (the factory) did not change. It was fixed at $2.00 no matter how many books you made.

12. 3. What happened to your average variable costs (Line 7) and your average total costs (Line 9) as the simulation progressed (in rounds 1-3 at least) ? Why? AVC and ATC both declined. Your TVC and TC were going up but your TP/ output was going WAY up. You were able to spread the costs out over many more books so the average cost of each book went down.

13. 4. What happened to your average fixed costs (Line 8) as the simulation progressed (in rounds 1-3 at least) ? Why? AFC declined. Your TFC stayed the same ($2.00) but your TP/ output was going WAY up. You were able to spread the cost ($2.00) out over many more books so the average fixed cost of each book went down by a lot. $2 ÷ 4 books = $.50 per book $2 ÷ 20 books = $.10 per book

14. 5. What happened to your average product (Line 11) and productivity (Line 12) as the simulation progressed (in rounds 1-3 at least) ? Why? Average product and productivity both increased. As the simulation progressed you became better and better at making books, you became more efficient, more productive.

15. 6. Why are low average costs and high productivity so important for a company? 1. Low average costs allow a company to have lower prices compared to their competitors and consumers prefer to buy from the lower priced company, assuming the products are the same. Companies will sell more and make higher profits. 2. There is a greater profit margin, the difference between Price and ATC, so they make more profit from every book they sell.

16. 7. What impact did the pollution control devices (the paper bags) have on your production? Why did this happen? They reduced production and productivity. The pollution control devices (paper bags) imposed an extra cost on the production process and made it harder for workers to be productive. The same thing occurs in the “real world” when companies have to install expensive pollution devices or safety equipment.

17. 8. How will high productivity affect a company’s growth? High productivity → lower average costs → lower prices (than competitors) → increased sales → greater profits → increased growth.

18. 9. How will high productivity affect employees’ wages? High productivity → lower average costs → lower prices (than competitors) → increased sales → greater profits → increased growth → increased wages for employees.

19. 10. How will high productivity affect a country’s growth and its citizens’ standard of living? High productivity → increased growth of a nation’s economy → an increased standard of living for its citizens. High productivity is the best predictor of a country’s standard of living for its citizens. U.S., Japan, Switzerland all have high productivity and all have high standards of living. China’s is rapidly increasing.

20. Wages and Labor Productivity (2002)

22. U.S., 1950-2005

23. GDP per Hour Worked in OECD Countries as a % of U.S. (blue line) (2010)

24. Difference from the average of the 15 richest OECD Countries (2008)

26. 11. What are 3 things that individuals, companies, and the government can do to increase productivity and their own economic well being? 2. Specialization and division of labor. You broke the bookmaking up into separate jobs. 3. Investment in capital goods (machinery, technology). You bought more pens. 1. Investment in human capital (education, training). As you played each round you learn how to make the books better.

27. a. Individuals get more education and training 11. Investment in human capital (education, training, health care). As you played each round you learn how to make the books better. b. Businesses train workers and pay workers to go back to school to get more education; many businesses pay for health care. c. Countries train workers and provide “free” education through 12 th grade and pay for part of college and for healthcare.

28. a. Individuals specialize in their work. b. Businesses break their businesses up into lots of small specialized jobs. c. Different areas of a country specialize, California- entertainment, Arizona- computer chips 11. Specialization and division of labor. You broke the bookmaking up into separate jobs.

29. a. Businesses constantly invest in new machinery, computers, telecommunications. b. Governments give tax breaks to business to encourage them to buy more machinery and technology. 3. Investment in capital goods (tools, equipment machinery, technology). You bought more pens.