Transcript Marginal Product

SUPPLY
Definition: The various quantities of
a good or service that producers are
willing and able to sell at all prices
at a particular time.
Why do producers produce?
Two Words.
Profit
Motive.
**Remember the invisible hand?
Demand drives
Supply…
Law of Supply
•
•
•
•
As P ↑, QS ↑
As P ↓, QS ↓
Opposite of the law of demand
Why? Example…
After School Tutoring
How many 1 hr. sessions might you give if you
were able to charge…..
Price Quantity
$5/hr?
$7.50/hr?
$10/hr?
…$50/hr?
As you are able to charge more, production
becomes more valuable relative to other tasks.
What is your opportunity cost of tutoring?
The Law of Supply
Reasons for a Change in Quantity Supplied:
(Always associated with a change in a product’s own price)
1. Assuming firms’ costs are constant, at higher prices,
producers make more profits.
- Economies of Scale – as businesses grow,
production costs tend to shrink
2. When prices rise, firms substitute
production of one good for another.
-Aunt Jemima
Supply Schedule/Curve
• Notice… opposite
of Demand curve
• Upsloping
• Individual Supply
vs. Market Supply
Change in Quantity Supplied: Movement
along the Supply Curve
Price (per unit)
S0
B
$15
A
Change in quantity
supplied (a movement
along the curve)
1,250
2,300
Quantity supplied (per unit of time)
Shifts in Supply Versus Movements Along a Supply
Curve
If the amount supplied is affected by
anything other than a change in price, there
will be a shift in supply.
Shift in Supply
S0
Price (per unit)
S1
$15
A
B
Shift in Supply
(a shift of the curve)
1,250
2,300
Quantity supplied (per unit of time)
7 Reasons for a change in supply
1. Change in the cost of inputs
 Land, labor, capital
2. Change in Productivity
3. Change in Technology
 Ask Henry Ford…
4. Change in Number of Sellers
 Duh.
5. Change in Taxes or Subsidies
 Excise tax
6. Change in Market
Expectations
 Future
prices/demand/conditions
7. Change in Government
Regulation
Elasticity of Supply
• Elastic – easy/quick to produce – lower
marginal cost for each additional unit
produced
• Inelastic – harder/slower to produce – higher
marginal cost for each additional unit
produced
• Elasticity of supply increases as producers have
more time to adjust to a price change
• Ex: 1979
Today
Factors Affecting Elasticity of Supply
1. Ease of Production
easier = more elastic
2. Responsiveness to price
change
quicker adjustment =
more elastic
3. Time
more time to adjust =
more elastic
Elastic –or- Inelastic?
Elasticity of Supply changes over time
• Market Period – immediately after a change in price
– Perfectly inelastic supply
• Short Run – up to a few months after a change in
price
– Inelastic or somewhat elastic supply
– Fixed plant size
• Long Run – many months/years after a price change
– Perfectly Elastic supply
– Adjustable plant size
Price Elasticity of Supply
The Market Period
• Perfectly inelastic supply
P
Sm
Greatest
Price
Impact
Q0
Q
6-16
Price Elasticity of Supply
The Short Run
• Somewhat inelastic supply
P
Ss
Lower
Price
Impact
Fixed land.
Some fixed capital.
More labor?
More fertilizer?
Q
6-17
Price Elasticity of Supply
The Long Run
• Elastic supply
P
Sl
Least
Price
Impact
Q
6-18
• Read Chapter 5, Lesson 2,
complete pg. 139 #1-3, #5
Widget
Production Simulation
Production= Converting inputs into output
Analyzing
Lets look at an example
to show the relationship
Production
between inputs and
outputs
Production Simulation
Step 1: Cut
paper down
the middle into
two piece
Step 2: Fold
piece down the
middle
Step 3: Wrap
ends around
and staple
Step 4: Add
more links
to one end
Production
Simulation
Overview
•
•
The class will be divided into two firms.
There will be several rounds in which each firm will produce
chains out of paper.
• Each round will last exactly 2 minutes
• Each firm is going to hire one more worker at the start of
each round.
Resources
• 1 stapler, 1 scissors, 2 desks, and plenty of staples and paper
Rules
• Workers cannot stockpile slips of paper. No extras
• Workers cannot cut more than one paper at a time
• Workers can only add links to one side of the chain
• Each link must pass inspection
• If links don’t meet specifications they won’t count
Responsibilities
• The manager will hire the workers.
• The inspector will check to make sure each product is made
to specifications
Production Simulation
Complete the chart for your firm
Number of
Workers (inputs)
0
1
2
3
4
5
6
7
Firm’s Name: ____________
Total Product
(output)
Marginal
Product
Simulation Debrief
Key Questions:
1. What happened to the number on links
produced as more workers were hired?
2. Why can the second worker generate more
additional links than one worker working
alone?
3. Why did the additional output for each
worker eventually start to fall or even go
negative?
4. What would happen to total output if every
student in the room tried to make links given
the limited resources?
Resources (Factors of Production)
Fixed ResourcesResources that DON’T change with the amount
produced
What were the fixed resources?
Stapler, scissors, and table
Variable ResourcesResources that DO change as more or less is
produced
What were the variable resources?
Workers, paper, and staples
Practice - Identify 3 fixed and 3 variable
resources for a pizza restaurant
Inputs and Outputs
• To earn profit, firms must make products (output)
• Inputs are the resources used to make outputs.
• Input resources are also called FACTORS.
•Total Physical Product (TP)- total output or quantity
produced
•Marginal Product (MP)- the additional output
generated by additional inputs (workers).
Marginal Product =
Change in Total Product
Change in Inputs
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ACDC Leadership 2015
Production Analysis
•What happens to the Total Product as you hire
more workers?
•What happens to Marginal Product as you hire
more workers?
•Why does this happen?
The Law of Diminishing Marginal Returns
As variable resources (workers) are added to fixed
resources (machinery, tool, etc.), the additional output
produced from each new worker will eventually fall.
Too many cooks in
the kitchen!
Graphing Production
Short Run Production Worksheet
Three Stages of Returns
Stage I: Increasing Marginal Returns
MP rising. TP increasing at an increasing rate.
Why? Specialization.
Total
Product
Total
Product
Quantity of Labor
Marginal
Product
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ACDC Leadership 2015
Marginal Product
Quantity of Labor
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Three Stages of Returns
Stage II: Decreasing Marginal Returns
MP Falling. TP increasing at a decreasing rate.
Why? Fixed Resources. Each worker adds less and less.
Total
Product
Total
Product
Quantity of Labor
Marginal
Product
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ACDC Leadership 2015
Marginal Product
Quantity of Labor
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Three Stages of Returns
Stage III: Negative Marginal Returns
MP is negative. TP decreasing.
Workers get in each others way
Total
Product
Total
Product
Quantity of Labor
Marginal
Product
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ACDC Leadership 2015
Marginal Product
Quantity of Labor32
With a partner calculate MP and then identify the 3
stages of production.
# of Workers
(Input)
Total Product(TP)
PIZZAS
0
0
1
10
2
25
3
45
4
60
5
70
6
75
7
75
8
70
Marginal
Product(MP)
What are the three stages of returns?
Can you identify each?
# of Workers Total Product(TP)
PIZZAS
(Input)
0
1
2
3
4
5
6
7
8
0
10
25
45
60
70
75
75
70
Marginal
Product(MP)
10
15
20
15
10
5
0
-5
Identify the three stages of returns
# of
Workers
(Input)
Total
Product(TP)
PIZZAS
Marginal
Product(MP)
0
1
2
3
4
5
6
7
8
0
10
25
45
60
70
75
75
70
10
15
Increasing
Marginal
Returns
20
15
10
Decreasing
Marginal
Returns
5
0
-5
Negative
Marginal
Returns
Tony’s Hat Store!!
• Review…..
Increasing
Marginal
Returns
Diminishing
Marginal
Returns
Negative
Marginal
Returns
Profit maximization
• Profit = Total Revenue - Total Cost
• Total Cost = Fixed Cost + Variable Cost
• Fixed vs. Variable… examples?
– Fixed – rent, loan payments, capital equipment
– Variable – labor, raw materials
• Firms want TR > TC…
• But how do they maximize this profit?
• MARGINAL ANALYSIS!!!!
– Firms act on the margin
– Additional workers
– Layoffs
• Marginal CostProfit
= ∆ Cost
of Inputs/ ∆ Output
maximization
– Do all costs change when you increase production in the
short run?
– Revised equation: MC = ∆ Variable Cost/ ∆ Output
• Marginal Revenue = Price
?????
each unit is sold for
• MC and MR are PER UNIT measurements
• Profit Maximization:
– As long as MR > MC, producers will continue to produce.
– Reach the point where MR = MC
• If Coca Cola can invest $2000 to produce 10,000
additional cans of coke that they can sell for $0.30 a
can.... Should they?
– MC = $2000/10,000 = $0.20 per can
– MR = $0.30 per can
– Yesssss!!!!!! - $0.10 profit per can!
• Production Function.notebook
How many workers would you hire if you could hire for minimum
wage and sell each widget for $2? **(Follow MR ≥ MC rule.)
Number of
Workers (inputs)
0
1
2
3
4
5
6
7
Total Product
(output)
Marginal
Product
Marginal
Revenue
Marginal
Cost
**Each widget is sold for $15
Test Topics
•
•
•
•
Definition/Law of Supply
Supply Curve
Market Supply
Change in Supply
– 7 factors
• Elasticity of Supply
– 3 factors
• 3 Stages of Production
• Profit Maximization
– MR = MC