1. Unit 3: Costs of Production and Perfect Competition
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2. Production = Converting inputs into output
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3. Widget Production Simulation
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4. 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 1 minute
Each firm is going to hire one more worker at the start of each round.
Resources
1 stapler, 1 scissors, 1 table, 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
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5. 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
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6. Fill out this chart based on your firm’s production
# of Workers
(Input)
# of Links
(Output)
Marginal
Product 1 2 3 4 5 6

7. 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
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8. Fixed vs. Variable
Fixed Resources- Resources that don’t change with the quantity produced
Ex: Table, scissors, and stapler
Variable Resources- Resources that do change with the quantity produced
Ex: Workers, paper, and staples
Identify three fixed resources and three variable resources for a pizza restaurant 8
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9. The Law of Diminishing Marginal Returns Too many cooks in the kitchen!
Production Analysis
What happens to marginal product as you hire more workers?
Why does this happens?
The Law of Diminishing Marginal Returns
As variable resources (workers) are added to fixed resources (ovens, machinery, tool, etc.), the additional output produced from each additional worker will eventually fall.
Too many cooks in the kitchen!
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10. Notice that as you hire more workers the additional links each additional worker creates begins to decrease
This is because of the fixed resources and the Law of Diminishing Marginal Returns

11. Graphing Production
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12. 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 12
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Marginal Product

13. 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 13
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Marginal Product

14. 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
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Marginal Product

15. 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

16. 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

17. 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

18. 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

19. 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

20. More Examples of the Law of Diminishing Marginal Returns
Example #1: Learning curve when studying for an exam
Fixed Resources-Amount of class time, textbook, etc.
Variable Resources-Study time at home
Marginal return-
1st hour-large returns
2nd hour-less returns
3rd hour-small returns
4th hour- negative returns (tired and confused)
Example #2: A Farmer has fixed resource of 8 acres planted of corn. If he doesn’t clear weeds he will get 30 bushels. If he clears weeds once he will get 50 bushels. Twice -57, Thrice-60. Additional returns diminishes each time.
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21. Tony’s Hat Store Worksheet
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