1. Production= Converting inputs into output
Widget Production Simulation
Production= Converting inputs into output

2. Analyzing Production
Lets look at an example to show the relationship between inputs and outputs

3. 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 2 minutes
Each firm is going to hire one more worker at the start of each round.
Resources
1 stapler, 1 scissors, 2 desks, 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

4. 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

5. Production Simulation
Complete the chart for your firm:
Number of Workers (inputs)
Total Product (output)
Marginal Product 1 2 3 4 5 6 7

6. Simulation Debrief Key Questions:
What happened to the number on links produced as more workers were hired?
Why can the second worker generate more additional links than one worker working alone?
Why did the additional output for each worker eventually start to fall or even go negative?
What would happen to total output if every student in the room tried to make links given the limited resources?

7. Resources (Factors of Production)
Fixed Resources-
Resources that DON’T change with the amount produced
What were the fixed resources?
Stapler, scissors, and table
Variable Resources-
Resources that DO change as more or less is produced
What were the variable resources?
Workers, paper, and staples
Practice - Identify 3 fixed and 3 variable resources for a pizza restaurant

8. 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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ACDC Leadership 2015

9. The Law of Diminishing Marginal Returns Too many cooks in the kitchen!
Production Analysis
What happens to the Total Product as you hire more workers?
What happens to marginal product as you hire more workers?
Why does this happen?
The Law of Diminishing Marginal Returns
As variable resources (workers) are added to fixed resources (machinery, tool, etc.), the additional output produced from each new worker will eventually fall.
Too many cooks in the kitchen!

10. Graphing Production
Short Run Production Worksheet

11. 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 11
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ACDC Leadership 2015
Marginal Product

12. 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 12
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ACDC Leadership 2015
Marginal Product

13. 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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ACDC Leadership 2015
Marginal Product

14. 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

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 15 3 45 20 4 60 5 70 6 75 7 8 -5

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
12.5 3 45 20 4 60 5 70 14 6 75 7
10.71 8 -5
8.75

17. What are the three stages of returns? Total Product(TP) PIZZAS
Can you identify each?
# 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
Increasing Marginal Returns
Decreasing Marginal Returns
Negative Marginal Returns

19. Law of Diminishing Returns10 20 30
Total Product, TP 1 2 3 4 5 6 7 8 9 TP 20 10
Marginal Product, MP 1 2 3 4 5 6 7 8 9
Increasing
Marginal
Returns
Diminishing
Marginal
Returns
Negative
Marginal
Returns AP MP
8-19

20. Tony’s Hat Store Worksheet
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ACDC Leadership 2015

21. *Note to teacher*
After you complete this activity, create this poster with the links and put it on the wall. This poster includes yellow links to show marginal product.
It shows the relationship between inputs and outputs and will be extremely beneficial as you teach production costs.