Brief Response
• Explain the difference between elastic
demand and inelastic demand (2).
• When a good or service has elastic demand,
people will respond quickly to a change in
price.
• When it has inelastic demand, people will not
change their demand even if there is a large
change in price.
Microeconomics
Ch 5, sects 2 & 3
Section 2
Theory of Production
• 122 relationship between the
– Factors of production
– Output of goods and services
Short run
• 122 period of production that allows
producers to adjust ONLY the
amount of the variable input called
labor.
–Ford laying off 300 workers in a factory
Long run
• 122 a period of production long
enough for producers to
–Adjust the quantities of all their
resources
• Including capital
–Ford closes down an entire factory
–Or
–Ford puts in new machinery, retools
parts, changes labor,
Law of Variable Proportions
• 122 in a short period:
• Output will change as one input is varied
• Other inputs stay the same
– Ex.: farmer
•
•
•
•
Changes fertilizer
Same machines
Same Laborers
Same Land
– Affects output by varying fertilizer
Production function
• 123 Used in the Law of Proportions
• describes the relationship between
– Changes in output
– Different amounts of a single input
• While other inputs are held constant
Raw materials
• 123 unprocessed natural products
– Used in production
• Factor of production
Total product
• 123 the total output produced by a firm.
Marginal product
• 124 The extra output or change in total
product caused by the addition of ONE more
unit of variable input.
• Producer must watch to be able to decide
whether the cost of making that next unit is
worth it or not.
• It is important to producers to avoid wasting
resources and capital that cut into profits and
efficiency.
Stages of production 4/17
Margina
l
Product
• 125 increasing production
Margina
• Diminishing returns
(but still making money
l
Product
compared to input
costs)
• Negative returns (losing money compared to
input costs)
• EC: Where are the two marginal product
points?
Diminishing returns
• 125 the stage where output increases at an
increasingly slower rate
• As more units of variable input are added
Section 3 p. Terms:
• Fixed cost
• 127 the cost that a business incurs even if the
plant is idle and output is zero
Overhead
• 127 Total fixed cost of operating a business
• Includes:
– Salaries/wages/insurance
– Interest charges on bonds/loans
– Rent/lease payments
– Maintenance/upkeep/insurance
– Local/state property taxes
– Depreciation
• Gradual wear and tear on capital goods
Variable cost
• 128 cost that changes
• When the business rate of operation or output
changes.
• Generally associated with
– Labor
• Hired
• Laid off
– Raw materials
– Power
– Transportation
Total cost
• 127 the sum of the fixed and variable costs
required to operate a business.
E-commerce
• Electronic business or exchange
– Conducted over the Internet
• Does not need to spend large amounts of overhead
• Most famous:
– Amazon (US)
– Ebay (US)
– Ali Baba (PRC)
• Many retailers with physical store locations have online catalogues and ordering…..Macy’s
Total revenue
• 130
• The number of units sold multiplied by the
average price per unit.
• Use chart on p. 128
– What is total revenue for 138 units?
– $2,070
Marginal revenue
• The extra revenue associated with the
production and sale of ONE additional unit of
output.
• Determined by dividing the change in total
revenue by the marginal product.
Marginal analysis
• A type of cost-benefit decision making
• Compares the extra benefits to the extra
costs of an action.
• Done in small, incremental step process.
• Helpful….
– Break-even analysis
– Profit maximization
Break-even point
• It’s the total output or total product the
business needs to sell in order to cover its
total costs.
Profit-maximizing quantity of output
• 131
• Is reached when marginal cost and marginal
revenue are equal
Hwk Assessments, Class Work,
to Know
Assessments: Checking for Understanding
CH 5, S2
• 1
• As input changes
– Production of outputs also changes
• First, each input will cause an increase
• Then, each input will cause an increase in
increasingly smaller increments
• Finally, each input will cause a decrease.
CH 5, S2
• 3
• The theory of production states that changing
factors of production (inputs) will
• Change the output of goods and services
CH 5, S2
• 4
• In stage I, marginal product increases
• In stage II, marginal product continues to
increase, but at a slower rate.
• In stage III, marginal product becomes
negative.
CH 5, S2
• 5
• Workers will be in each other’s way and
output will decrease.
Assessments: Checking for Understanding,
CH 5, S3
•
•
•
•
1
The cost of inputs influences supply.
The supply influences the number sold.
The number sold multiplied by the average
price per unit is the total revenue.
CH 5, S3
•
•
•
•
•
3
Fixed cost
Variable cost
Total cost
Marginal cost
CH 5, S3
• 4
• Total revenue
• The number of units sold multiplied by the
average price per unit.
• Marginal revenue
• The extra revenue associated with the
production and sale of ONE additional unit of
output.
CH 5, S3
• 5
• By comparing the marginal revenue and the
marginal cost of adding extra units of variable
input, the break-even and profit-maximizing
points can be established.
Image, p. 124
• Question
• As
– increasing returns,
– Diminishing returns
– Negative returns
• Determined by marginal product
Images, p. 128
• Question
• Total cost of the sum of fixed and
variable costs.
• Marginal cost is the cost incurred by
producing one additional unit of
product.
Using the chart on p. 128
• What is the change of marginal revenue when one extra
worker is added to the 8 already working?
• an increase of $0/unit.
• Where is the break-even point?
– Between 7-20 units of total product (the 2nd worker)
• After that, what begins?
– Profit
• profits are maximized when which worker is added? Explain
why.
• Ninth,
– Total profit starts to fall
Brief Response:
Use the Image, p. 128
• Given other factors, is it worth producing?
explain
• 110 units?
• 145 units?
Investment Project
Place where needed
• Instruction sheet
• Making an Excel spreadsheet.