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Making Product Decisions

Making Product Decisions. Economics, March 2011. Remember: we are the supplier, making decisions about what to PRODUCE!. Review: what is productivity?. Amount of goods and services produced per unit of input (how efficiently resources are being used in production).

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Making Product Decisions

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  1. Making Product Decisions Economics, March 2011

  2. Remember: we are the supplier, making decisions about what to PRODUCE!

  3. Review: what is productivity?

  4. Amount of goods and services produced per unit of input (how efficiently resources are being used in production)

  5. How to calculate productivity? • Step One: calculate total output

  6. Marginal Product: • Change in output generated by adding one more unit of input. Labor Input increases from 0 to 1, marginal product is 10, because 10

  7. Law of Diminishing Returns • Effect that varying the level of an input has on total and marginal product • As more of one input is added to a fixed supply of other resources, productivity increases UP TO A POINT. • Eventually it will result in a negative marginal product.

  8. 3 stages of production can be predicted by Law of DR: • Increasing marginal returns • Diminishing marginal returns • Negative marginal returns

  9. Diminishing Marginal Returns • When output begins to increase at a diminished, or lower, rate • Ex: there is not enough machinery to keep the 12th worker fully employed, thus total production increases, but at a lower rate than with the 11th employee • On a graph it would start to level off

  10. Negative Marginal Returns • Ex: the factory is overcrowded with workers and productivity decreases…

  11. Costs of Production • Any goods and services used to make a product

  12. Fixed Costs: • Store rent • Wear and tear on machines (repair costs… aging of machine is seen as a fixed cost)

  13. Variable Costs • Change as the level of output changes • Raw materials, wages

  14. Total Costs • At zero output… the total costs are equal to fixed costs

  15. Marginal Costs • Additional costs for producing one more unit of output… • Fixed costs do not change as production level increases • So to determine marginal costs, look at variable

  16. Calculating Marginal Costs • To increase tennis ball production from 985-1000 a day… • Variable costs increase from $2,580-$2,795 • Marginal cost is the additional cost (2795-2580=$215) divided by the number of additional ducks (1,000-985=15) • $215 /15 = $14.33

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