1. Chapter 4 – Costs of Production
Part IV-Review
Chapter 4 – Costs of Production

2. Need ONE volunteer

3. Your thoughts.. Who loves sushi?
All-you-can-eat-sushi (AYCE).. What is that an example of?
As a person begins to fill up on food, the enjoyment declines with each serving until the satisfaction falls low enough to stop eating
Diminishing Marginal Returns

4. Some key concepts…
Not every unit of input will lead to a proportional increase of output
At one point, adding more input gives you a smaller rate of return
Adding an extra person will not give me the same rate of output, instead, the rate starts decreasing
If you continue adding more input, you will reach a stage that you do not get a positive return for extra unit of input, but you will decrease your overall output

5. The Law of Diminishing Marginal Returns
Short-run production is determined by the law of diminishing marginal returns. According to this law:
the addition of more variable input causes marginal product to fall after some point
average product also falls after some point 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 50
100
150
200
250
300 TP 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 40 60 80
100
120
-20 20
Diminishing
returns set in AP MP
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

6. Average Vs Marginal Product
AP = Average product
The average rises if the marginal value is graphically “above” the average value 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 50
100
150
200
250
300 TP 1 2 3 4 5 6
Number of Workers Employed per Day
T-Shirts Produced per Day 40 60 80
100
120
-20 20
Diminishing
returns set in AP MP

7. Average Vs Marginal Product
Let’s use EXAMS as an example (get the pun?)
Marginal mark is the mark on each test
Average mark is the total earned so far divided by the number of completed tests
IE: Marginal Mark for Test 1: 36/50 (Reference Point); Avg Mark 36/50
Marginal Mark for Test 2: 38/50
Marginal mark on Test 2 is ABOVE the average, therefore the new average mark will RISE
Average Mark: (38+36)/2 = 37
b)Marginal Mark for Test 2: 34/50
Marginal Mark on Test 2 is BELOW the average, therefore the new average mark will FALL
Average Mark: (36+34)/2 = 35

8. Short-Run Costs for Pure ‘n’ Simple T-Shirts
Labour
(L)
Total
Product
(q)
Fixed
Costs
(FC)
Variable
(VC)
Cost
(TC)
(FC + VC)
Marginal
(MC)
(ΔTC/Δq)
Average
Fixed Costs
(AFV)
(FC/q)
(AVC)
(VC/q)
(AC)
(AFC + AVC)
Marginal Product (MP) 1 2 3 4 5 80
200
250
270
280
$825
825 $0
140
300
425
535
640
$825
965
1125
1250
1360
1465 80
120 50 20 10
140
160
125
110
105
$1.75
1.33
2.50
5.50
10.50
$10.31
4.13
3.30
3.06
2.95
$1.75
1.50
1.70
1.98
2.29
$12.06
5.63
5.00
5.04
5.24
Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

9. Costs in the Short Run Fixed Costs (costs of all fixed inputs)
Variable Costs (costs of all variable inputs)
Total Costs (FC + VC)

10. Returns to Scale
1. Increasing Returns to Scale 2. Constant Returns to Scale 3. Decreasing Returns to Scale

11. Returns to Scale
1. Increasing Returns to Scale (Economies of Scale) 2. Constant Returns to Scale 3. Decreasing Returns to Scale

12. In a nutshell (Big Concept)
As the firm begins to grow and expands, it becomes better at what it is producing
Getting more output per unit of input
Lower Average Total Costs (ATC) as it grows larger
Nike VS DrLaiSmallShoeStore
Who has economies of scale? Nike

13. 1. Increasing Returns to Scale– 3 types
Division of Labour (Labour Specialization)
Specialized Capital
Specialized Management

14. a) Division of Labour
Performing fewer tasks allows workers to become more efficient at their jobs
Quantity output rise more quickly than the number of workers producing them
Specialization will help increase output
ie: employees who use a keyboard can increase their marginal productivity by becoming better typists, which reduces the cost, of each additional word typed

15. b) Specialized Capital
Money used to buy specialized machinery will increase the scale of production because it performs tasks more efficiently

16. c) Specialized Management
When the scale of production is small, there are few managers. Therefore each manager has to do many duties that they may not be comfortable with
Example: An accounting manager has to deal with HR related issues
Ie: Dr.Lai, who specializes in Biology, Chemistry and Accounting, has to teach Arts Class
Hiring Managers with specialized roles will increase efficiency and increase output

17. Returns to Scale
1. Increasing Returns to Scale 2. Constant Returns to Scale 3. Decreasing Returns to Scale

18. 2. Constant Returns to Scale
Situation which a % increase in all inputs results in an equal % in output
If I DOUBLE my input, I will DOUBLE my output
If I HALF in input, I will HALF my output

19. Zynga In 2007, most successful gaming company developer for Facebook
Went Public at $11/share in Price in 2017 $2.50/share
What happened?

20. Returns to Scale
1. Increasing Returns to Scale 2. Constant Returns to Scale 3. Decreasing Returns to Scale

21. 3. Decreasing Returns to Scale
Also known as diseconomies of scale
A % increase in input causes a smaller % increase in output
Ex: 100% expansion inputs in the production of Cars will lead to its output rising by 5%
2 major reasons
Management Difficulties
Limited Natural Resources

22. In a nutshell…
When a firm grows so large so fast, they begin to experience inefficiencies
Zynga GM

23. Short Run
The only variable resource is labour and raw materials
What happens if demand increases for the firm’s product?
Increase employee work hours
Hire more workers
Cannot expand factory size
Long Run
Can adjust ALL inputs
Land
Labour
Capital
LR has several different short-runs that spread out over the range of output

25. Returns to Scale and Long-Run Costs
Quantity of Magazines per Week
$ per Magazine
Range A
Range B
Range C
Long-Run Average Costs
AC1
AC4
Long-Run AC
AC2
AC3

26. Some Exceptions
Most businesses face this saucer- shaped long-run average cost curve

27. Possible Long-Run Average Costs
Costs in the Long Run
There are some industries that ONE RANGE will DOMINATE the LR average cost
Possible Long-Run Average Costs
Quantity of Output
$ per Unit
Extended Range of
Increasing Returns
to Scale
Quantity of Output
$ per Unit
Extended Range of
Constant Returns
to Scale
Quantity of Output
$ per Unit
Extended Range of
Decrease Returns
to Scale
Long-Run AC
Long-Run AC
Long-Run AC
Craft Industries
Primary Industries
Manufacturing Industry

28. Assembly Line..

29. Craft Industries Goods that are handmade Pandora Jewelry is an example
Raising output levels of crafts = repeating the exact same method of production
= increase in input = increase in output

30. Try
Try the questions attached in the package

31. Kahoot time!