Making Product Decisions 4.3 Productivity—The amount of goods produced per unit of...

Making Product Decisions 4.3 Productivity—The amount of goods

produced per unit of input.(Efficiency) Total Product Output—All the product

that a company makes in a given period of time.

Marginal Product—The change in output generated by adding one more unit of input. Pizza—5 people produce 100 pizzas/day Add 1 more person: 115 pizzas produced/day What was the marginal product? ______

Law of Diminishing Returns Describes the effect that varying

the level of an input has on total and marginal product. (Productivity increases up to a point, then the marginal product starts to fall.)

Ex. Pizza owner applying laborers to the kitchen?

When do returns start to fall?

Diminishing Marginal Utility

# People Pizzas Sold

Avg. Person

Marginal Product

5 100 20

6 120 20 20

7 175 25 55

8 240 30 65

9 250 27.7 10

10 230 23 -20

Marginal Returns 4.3 Increasing Marginal Returns— Diminishing Marginal Returns— Negative Marginal Returns— (See Figure 4.5 transparency)

Marginal Returns--Visual

Cost of Production 4.3 The costs of production directly

affects the amount of profit businesses make.

Ex. Sat. morning time to mow 1 lawn: You are paid $20 1 takes 1 hour to mow, other takes 2 hrs. Which do you mow? Why?

Husqvarna stealth lawn mower $2399 Watch out lawn businesses!

Costs of Production 4.3 Fixed Costs—Production costs

that do not change as the level of output changes. Ex. Rent, taxes, salariesDepreciation—The lessening value of

a capital good.

Depreciation Example You buy a $40,000 truck for your

business: Government allows you to depreciate it:

Year 1 = $8,000 Year 2 = $8,000 Year 3 = $8,000 Year 4 = $8,000 Year 5 = $8,000 Total Depreciation = $40,000 tax write off

Costs of Production 4.3 Variable Costs—Changes as the

level of output changes. Ex. Raw materials, wages, Total Costs—The sum of fixed and

variable production costs for a business.

Marginal Costs—The additional costs of producing one more unit of output.