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.