The Theory of Production

5.2: p. 122

How much salt is “just right”?

Law of Variable Proportions

In the short run, output will change as one input is varied while the others are held constant

• Deals with the relationship between input of productive resources and the output of final products

• How is the output of the final product affected as more units of one variable input or resource are added to a fixed amount of other resources?

• In a flower nursery, name one thing that can be changed while all other things remained constant.

• Soil type• # of workers• type of seed• fertilizer amount• Fertilizer type• Sunlight • Water

The Production Function• A concept that

describes the relationship between changes in output to different amounts of single input while other inputs are held constant

• Production Schedule, Production Function– See figure 5.5 p. 124

Cost, Revenue, and Profit Maximization

5.3: p. 127

In pairs, Determine if the following are fixed or variable costs

• Salaries paid to executives• Salaries to Wage earning workers• Rent payment• Electric bill• Property taxes• Freight Charges• Depreciation of machinery• Cost of factory building• Cost of Raw Materials• Cost of Large machinery

• Fixed• Variable• Fixed• Variable• Fixed• Variable• Fixed• Fixed• Variable?• Fixed

MOST OF THESE CAN BE ARGUED!!!

Example: Automatic Car Wash• Compare the fixed costs to the variable costs.

Make a list of each.• Would you keep the facility open 24/7 or, to save

money, only during certain hours? Why?• How would this change for a hand-wash

business?

E-Commerce

• Why is E-Commerce attractive to businesses who want to keep their costs down?

LOW OVERHEA

D

TV Demographics• Children & Teen TV Usage

Let’s look @ the homework

• http://kis-econ-fall08.wikispaces.com/UNIT+2+-+DEMAND%2C+SUPPLY%2C+%26+PRICES

Revenue

• What is the difference between total revenue and marginal revenue?

• TR = Units sold X Price per unit• MR = Change in TR / Marginal Product

Review• Let’s study the chart on p. 128.Explain:• Total Product• Marginal Product• Total Fixed Costs• Total Variable Costs• Total Costs• Marginal Costs

– Why does Marginal Costs start high, drop, and then rise again?• Total Revenue

– How do we compute this?• Marginal Revenue

– Will MR always be constant ($15)• Total Profit• What is the price of each item being sold?

– What are 2 ways we can compute this?

Marginal Analysis• Analyze the chart again. • What is the break-even point?• What is the profit-maximizing quantity of

output? Why?