Understand the law of diminishing returns Understand the the different types of cost Understand the concept of revenue Understand the concept of profit

Apple has now emerged as the second largest company in the world. Two decades ago was practically a nonentity. How do you think Apple economists have contributed to this success, and what advice could they continue to offer into the future?

(Apple was ranked the most valuable company in 2012)

In your groups, select a factory owner/data recorder. Your task is to produce as many

bracelets as possible with the provided space and resources. (In a given period of time)▪ With 1 worker = Total Product?▪ With 2 worker = Total Product?▪ With 3 worker = Total Product?▪ With 4 worker = Total Product?▪ With 5 worker = Total Product?

To what extent can production increase when only the amount of labor employed can change?

States as additional units of a variable resource/input (labor) are added to a fixed resource/input (capital),

beyond a certain point the output attributable to additional units of the variable resource will decline.

With only a limited supply of technology at their disposal, workers in a factory can only increase their productivity to an extent.

What does the law of diminishing returns state?

States the relationship between inputs and outputs

Inputs – the factors of production classified as: Land – all natural resources of the earth – not just

‘terra firma’! ▪ Price paid to acquire land = Rent

Labour – all physical and mental human effort involved in production▪ Price paid to labour = Wages

Capital – buildings, machinery and equipment not used for its own sake but for the contribution it makes to production▪ Price paid for capital = Interest

Inputs Process Output

Land

Labour

Capital

Product or service

generated– value added

Costs are classified as: Fixed costs – costs that are not related

directly to production – rent, rates, insurance costs, admin costs. They can change but not in relation to output

Variable Costs – costs directly related to variations in output. Raw materials primarily

Total Cost - the sum of all costs incurred in production TC = FC + VC

Average Cost – the cost per unit of output AC = TC/Output

Total revenue – the total amount received from selling a given output

TR = P x Q Average Revenue – the average

amount received from selling each unit AR = TR / Q

Profit = TR – TCThe reward for enterpriseProfits help in the process of

directing resources to alternative uses in free markets

Relating price to costs helps a firm to assess profitability in production

When the level of output produces and sells = cost to produce

TR – TC =0= Break even point

Break even level of output = TFC/(price per unit- VC per unit)

Average revenue per unit = TR / total unit sold

Profit (loss) per unit = AR – AC

Area of loss

Example 1 If the fixed costs are $100 if the average

variable cost is $2, and if the selling price is $2.50 per unit then:

a)      the total cost of producing q units is given by the cost function ; C (q)= 100 + 2 q

b)      the revenue from selling q units is given by the revenue function ;R (q)= 2.5q

c)      the profit from producing and selling q units is given by the profit function     

▪ P(q)= R(q)- C(q)▪ =2.5q-(100+2q)▪ =0.5q-100

d)      the break even point is determined by solving the equation

▪ 2.5q = 100+2q▪ 0.5q= 100▪ q=200

e)      The average cost is ▪ C(q)/q=(100+2q)/q = 2+(100/q)

A major airline carrier operating a scheduled (regular) service between London and New York analyses its carrying loads and spots that on the regular Wednesday evening flight, vacant seats are at their highest level of all the flights, amounting to an average of 45% of the plane.

What strategies might they adopt to attempt to fill those seats?

Hint: Think about the relationship between fixed costs, variable costs

If a firm need to increase output quickly or temporarily

▪ Have pay overtime ▪ Make production more efficient ▪ More labor▪ Motivate employees – bonus?

This can be achieved in the short run Increasing (scale of production)

significantly by expanding, purchasing new machinery hiring and buying new capital This can be achieved in the long run

Increasing return to scale = doubles all it’s inputs more than doubling it’s output

Diminishing return to scale = doubles all input and unable to double its output

Constant return to scale = doubles output and input

Economies of Scale = if making cost savings from the increase in scale of production

Diseconomies of scale = if average cost of production rises as the produce more

Cost savings by the way firms raise money Selling shares Borrowing money to buy machinery Lower interest (for loans)

Cost savings by the way they sell their product Buy in bulk Employ purchasing specialists and sales

people

Cost savings by method of production Specialized workers and machinery Research a faster method of production Types of transport

Cost savings by reducing the risk of fall in demand Using many different suppliers Diversification of goods

Too many departments and managers= disagreements

Disengagement of the workersStrikes and disruptions