DateDate: March 26, 2014: March 26, 2014

TopicTopic: Costs of Production: Costs of Production

AimAim: How do suppliers make production decisions?: How do suppliers make production decisions?

Do NowDo Now: Multiple Choice Questions. : Multiple Choice Questions.

DateDate: March 26, 2014: March 26, 2014

TopicTopic: Costs of Production: Costs of Production

AimAim: How do suppliers make production decisions?: How do suppliers make production decisions?

Do NowDo Now: Multiple Choice Questions. : Multiple Choice Questions.

Marginal UtilityMarginal Utility• For example, if you wanted donuts you might

eat one donut, then want to eat another, then want to eat another, etc. (Utility)

• After you have eaten a few donuts, you start not to want anymore.

• The thought of eating more makes you sick! (Diminishing Marginal Productivity/Utility)

Definition: What is gained from an increase/decrease in a good or service.

• Utility: Level of satisfaction or usefulness received from consumption of a good or service.

• *Your demand for products depends on this.

• Law of Diminishing Marginal Productivity: Your decreasing satisfaction as more of a good or service is acquired. Your utility will eventually decrease (probably hit 0)

Increasing Marginal Returns• A level of production in which the

marginal product of labor increases as the number of workers increase.

Cut the cloth into shapes, stuff it with beans, and sew the bag closed.

•As more of one resource is added, the output per unit of input may increase for a time, but eventually the increase of productivity will vanish (Law of diminishing returns)

Fixed CostsFixed Costs• Include: The production facility,

costs of building and equipping a factory, office, store or restaurant .

• Examples: Rent, property taxes, machinery repairs, salaries of workers (who keep the business running if production stops temporarily

Variable CostsVariable Costs• Include: The costs of raw materials and

some labor.

• Example: Electricity, heating bills, cost of labor- changes with the number of workers

• Produce more beanbags= more beans, more workers to stuff the beanbags

Is it possible that a person wouldn’t pay even $1 for

this car?

How does this coupon illustrate the concept of the law of

diminishing marginal utility?

How does the Law of Diminishing Marginal Productivity cause

suppliers to make production decisions?

How would a economic system in a recession impact the Law of

Diminishing Marginal Productivity?

Spraying Spraying StrawberriesStrawberries

• A strawberry farmer plans to spray his fields to reduce mildew

Here is the information the farmer has:• Area: the farmer has 100 acres planted in

strawberries• Mildew kills strawberries; aerial spraying

reduces or eliminates mildew• The local crop duster makes 5 spraying

passes per hire• Each hire costs $50

LETS MAKE ONE OF THESE!

1.) We need 1 director of the operation.

2.) Let’s start with 1 worker and go from there.

Number of Hires

Total Benefits

Marginal Benefits

Marginal Cost

MB - MC

1 $100 $100 $50 $50

2 $200 $100 $50 $50

3 $270 $70 $50 $20

4 $330 $60 $50 $10

5 $382 $52 $50 $2**

6 $420 $38 $50 ($12)

7 $450 $30 $50 ($20)

8 $460 $10 $50 ($40)

9 $460 $0 $50 ($50)

10 $455 ($5) $50 ($55)