Marketing Management 6.01 Part 3

1. Marketing Management 6.01 Part 3 The Production Process

2. Assembly Line Video http://www.popmodal.com/video/592/I-Love-Lucy-Lucy-and-Ethel-Wrapping-Chocolate

3. The Production Process • All business organizations are involved in some form of production. • All businesses use resources (land, labor and capital) to provide an end user with a good or service. • The supply (output) produced by a company depends on the amount of input that it puts in which varies based on their resources (capital, equipment, and number of employees) • There are several other factors that have an effect on a business’s output, such as productivity.

4. Stages of Production • The Production Process consists of the procedures used to turn materials into finished goods 1. Primary Production - This involves the extraction of raw materials from the earth. It includes such things as farming (agriculture), mining (coal, metals, precious stones), quarrying (extracting gravel, stone, etc.), fishing and forestry. 2. Secondary Production - involves transforming raw materials into goods. There are two main kinds of goods: • Consumer goods – e.g. washing machines, DVD players. • Industrial / capital goods – e.g. plant and machinery etc. Used by businesses themselves during the production process 3. Tertiary Production – This involves providing services, such as cleaners, taxi drivers, lawyers, banking services, education, baby sitting, And many others.

5. In production the addition of workers… • Could help a business or hurt a business. • Increasing returns: Adding resources or workers will result in an increasing ratio of product (marginal return) • Diminishing returns: Adding resources or workers will result in an decreasing ratio of product (marginal return) • Law of diminishing returns: When increasing amounts of one factor of production are employed in production along with a fixed amount of some other production factor, after some point, the resulting increases in output of product become smaller and smaller. • Marginal product: The amount of increase or decrease that occurs when an additional worker is used in the production process.

6. The table to the right presents the hourly production of Tacos as Waldo's TexMex Taco World employs different quantities of labor. The first column is the number of workers, the second is the total hourly production of Tacos and the third column is the marginal product generated by each additional worker.

7. Marginal product eventually reaches zero for the 8th worker and even declines for the 9th and 10th workers For the first 2 workers marginal product increases. This reflects increasing marginal returns. For the 3rd worker on, however, marginal product decreases. This reflects decreasing marginal returns and the law of diminishing marginal returns. The marginal product of the 3rd worker is 25 tacos, compared to 30 tacos for the 2nd worker. The marginal product of the 4th worker then declines to 20 tacos. For the 5th worker, the marginal product falls to 15. For each additional worker, the marginal product declines.

8. How does production relate to profits?Terms - Marginal cost: The additional costs it takes to make 1 more unit of output. Total revenue: The revenue received by a firm for the sale of its output. Total revenue is the price times quantity--the price received for selling a good times the quantity of the good sold at that price Marginal revenue: The change in total revenue resulting from a change in the quantity of output sold. Marginal revenue indicates how much extra revenue a firm receives for selling an extra unit of output. It is found by dividing the change in total revenue by the change in the quantity of output.

9. Calculating Marginal Revenue The marginal revenue received by a firm is the change in total revenue divided by the change in quantity, often expressed as this simple equation: marginal revenue = change in total revenue change quantity

10. Production Keypoints • Describe the impact of the law of diminishing returns on production decisions. • The addition of more employees can lead to an increase in output but at some point it can have a negative effect when more units are not produced or a decrease occurs. • Explain how total revenue and marginal revenue are used to determine the amount of output that will generate the most profit. • Total revenue is all the income generated by selling the products the company makes • Marginal revenue helps the company calculate whether to make a few more items • Marginal revenue is the extra revenue generated when a firm sells one more unit of output. It plays a key role in the profit maximizing decision of a firm relative to marginal cost. • A company must determine if the additional costs are worth spending.

11. Based on the information in the following chart, determine the point at which the law of diminishing returns begins to take effect:

12. DFour workers. The law of diminishing returns states that, at some point, continuing to add workers will reduce overall productivity. This occurs because there are limited amounts of other variables such as work space and raw materials. In the chart, the law of diminishing returns begins to take effect when the fourth worker is hired. Production increased by 14 with the addition of the second worker, and again by 14 with the addition of the third worker. However, the addition of the fourth worker only increased production by 8, which is the beginning of the decline. Adding the fifth and sixth workers created an even greater decline in productivity.