1. Theory Of Production

2. The Production Function (not conjunction junction!)
Main Ideas
The production function is a graph or figure that shows how a change in one production variable affects total output.
Production can be analyzed in terms of short-run or long-run relationships between inputs and outputs.
Marginal product is the extra output or change in total product caused by adding one more unit of input.

3. Production Function Look at figure 5.5 on page 137
Production function: a graph or figure that shows how a change in one production variable affects total output.
Look at figure 5.5 on page 137
Why is the use of the production function important in business?
It allows businesses to gauge whether additional input will result in extra output

4. Short Run
Short Run:
Only the amount of labor can change in production period.
Ex: Hire or fire workers

5. Short Run
Why is a short-run production function useful for measuring effects of changes in labor?
Output resulting from changes in labor can be evaluated using shorter periods, such as on a daily basis.
Output resulting from changes in other variables, such as land or capital, requires longer periods of evaluation.

6. Long Run
Long Run:
All factors of production may be changed in production period
Ex: Moving to a new building, changing owners

7. Total Product Total Product:
Total Output or production by a firm
Add inputs total product goes up
Add too many inputs total product will go down
See Figure 5.5
Just add all units produced for a given period of time

8. Marginal Product Marginal Product:
Extra output due to the addition of one more unit of input.
Change in output/ Change in input

9. Stages of Production
In Stage I of the production function, the marginal product increases with each additional worker.
Low production
Stage II of the production function operates on the principle of diminishing returns; marginal products are still positive, but decrease steadily.
Production grows and hit optimal level
In Stage III of the production function, the company has hired too many workers, and they interfere with one another and with production, causing marginal product to become negative.
Production falling

10. Diminishing Returns Diminishing Returns:
Stage of production where output increases at a decreasing rate as more units of a variable input are added.

11. Finding Marginal Costs
Main Ideas
The costs that an organization incurs even when there is little or no activity are fixed costs, or overhead.
Variable costs are usually associated with labor and raw materials and change with the business’s rate of operation or output.
Total cost is the sum of fixed and variable costs.
Marginal cost is the extra cost incurred to produce one more unit of output.

12. Fixed Costs Fixed Costs: Costs incurred just by owning a business
Ex: Salaries, Rent, Taxes

13. Variable Costs Variable Costs:
Costs that change due to operation or output changes
Ex: Laid off workers, raises, electricity, shipping

14. Total Cost
Total Cost:
Add variable and fixed cost together

15. Marginal Cost Marginal Cost
Extra cost of producing one additional unit of product
Additional costs
Additional output

16. Review What is the most useful measure of cost?
marginal cost
What types of costs must businesses compute to find marginal cost?
fixed costs, variable costs, and total costs
What does marginal cost represent?
the extra cost incurred when producing one more unit of output

17. Marginal Revenue Main Ideas
Average revenue is the average price of every unit of output.
Total revenue is all of the revenue a business receives.
Marginal revenue is the extra revenue a business receives from the production and sale of one additional unit of output.
Marginal revenue is the most important measure of revenue.

18. Marginal Revenue
Marginal revenue = change in total revenue change in total output

19. Scenario
 A leaf-raking business is considering hiring a new worker. The only cost to the business would be the worker's wage, which is $90 per day. The worker can rake four yards per day, and customers are charged a price of $20 per yard. 
Should the business hire the worker?
No. The marginal cost to hire the worker—$90 in wages—would be higher than the marginal revenue the firm would earn—4 yards X $20 = $80.