Microeconomics

1. Microeconomics Ch 5, sects 2 & 3

2. Section 2Theory of Production • 122 relationship between the • Factors of production • Output of goods and services

3. Short run • 122 period of production that allows production to change ONLY the amount of the variable input called labor. • Ford laying off 300 workers in a factory

4. 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

5. Law of Variable Proportions • 122 in the short run: • 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

6. 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

7. Raw materials • 123 unprocessed natural products • Used in production • Factor of production

8. Total product • 123 the total output produced by a firm.

9. 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 see if the cost of making that next unit is worth it or not. • It is important to producers to avoid wasting resources and capital that cuts into profits and efficiency.

10. Stages of production • 125 increasing production • Diminishing returns • Negative returns

11. Diminishing returns • 125 the stage where output increases at an increasing slower rate • As more units of variable input are added

12. Section 3 p. Terms: • Fixed cost • 127 the cost that a business incurs even if the plant is idle and output is zero

13. Overhead • 127 Total fixed cost • Salaries/wages • Interest charges on bonds/loans • Rent/lease payments • Maintenance/upkeep • Local/state property taxes • Depreciation • Gradual wear and tear on capital goods

14. 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

15. Total cost • 127 the sum of the fixed and variable costs.

16. E-commerce • Electronic business or exchange • Conducted over the Internet • Does not need to spend large amounts of overhead • Most famous: • Amazon • Ebay

17. 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

18. 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.

19. 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

20. Break-even point • It’s the total output or total product the business needs to sell in order to cover its total costs.

21. Profit-maximizing quantity of output • 131 • Is reached when • Marginal cost and marginal revenue are equal

22. Hwk Assessments, Class Work, to Know

23. Assessments: Checking for Understanding • 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.

24. Assessments • 3 • The theory of production states that changing factors of production (inputs) will • Change the output of goods and services

25. Assessments • 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.

26. Assessments • 5 • Workers will be in each other’s way and output will decrease.

27. Assessments: Checking for Understanding • 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.

28. Assessments • 3 • Fixed cost • Variable cost • Total cost • Marginal cost

29. Assessments • 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.

30. Assessments • 5 • By comparing the marginal revenue and the marginal cost of adding extra units of variable input, • Break-even and profit-maximizing points can be established.

31. Image, p. 124 • Question • As • increasing returns, • Diminishing returns • Negative returns • Determined by marginal product

32. 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 • EC: question? Given other factors, is it worth producing….. explain • 110 units? • Yes, • Marginal product is still high, total profit is high. • 145 units? • Maybe, • Marginal is negative; profit is falling, but still high.

33. 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 • After that, what begins? • Profit • profits are maximized when which worker is added? Explain why. • Ninth, • Total profit starts to fall

34. Investment ProjectPlace where needed • Instruction sheet • Making an Excel spreadsheet.