Unit 3:
Costs of Production and
Perfect Competition
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ACDC Leadership 2015
1
Production = Converting
inputs into output
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Widget
Production Simulation
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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 last exactly 1 minute
• Each firm is going to hire one more worker at the start of
each round.
Resources
• 1 stapler, 1 scissors, 1 table, 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
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ACDC Leadership 2015
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
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ACDC Leadership 2015
Fill out this chart based on your firm’s production
# of Workers
(Input)
# of Links
(Output)
Marginal
Product
0
1
2
3
4
5
6
6
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
•Average Product (AP)- the output per unit of input
Total Product
Average Product =
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ACDC Leadership 2015
Units of Labor
7
Fixed vs. Variable
• Fixed Resources- Resources that don’t
change with the quantity produced
– Ex: Table, scissors, and stapler
• Variable Resources- Resources that do
change with the quantity produced
– Ex: Workers, paper, and staples
Identify three fixed resources and
three variable resources for a pizza
restaurant
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8
Production Analysis
•What happens to marginal product as you hire
more workers?
•Why does this happens?
The Law of Diminishing Marginal Returns
As variable resources (workers) are added to
fixed resources (ovens, machinery, tool, etc.), the
additional output produced from each additional
worker will eventually fall.
Too many cooks in
the kitchen!
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ACDC Leadership 2015
Notice that as you hire
more workers the
additional links each
additional worker
creates begins to
decrease
This is because of the
fixed resources and the
Law of Diminishing
Marginal Returns
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Graphing Production
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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
and
Average
Product
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Average Product
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
and
Average
Product
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ACDC Leadership 2015
Average Product
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
and
Average
Product
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ACDC Leadership 2015
Average Product
Marginal Product
Quantity of Labor
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With your partner calculate MP and AP then discuss
what the graphs for TP, MP, and AP look like.
Remember quantity of workers goes on the x-axis.
# 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)
Average
Product(AP)
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With your partner calculate MP and AP then discuss
what the graphs for TP, MP, and AP look like.
Remember quantity of workers goes on the x-axis.
# 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)
Average
Product(AP)
-
-
10
15
20
15
10
5
0
-5
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With your partner calculate MP and AP then discuss
what the graphs for TP, MP, and AP look like.
Remember quantity of workers goes on the x-axis.
# 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)
Average
Product(AP)
-
-
10
10
15
12.5
20
15
15
15
10
14
5
12.5
0
10.71
-5
8.75
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Identify the three stages of returns
# 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)
Average
Product(AP)
-
-
10
10
15
12.5
20
15
15
15
10
14
5
12.5
0
10.71
-5
8.75
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Identify the three stages of returns
# 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)
Average
Product(AP)
-
-
10
10
15
12.5
20
15
15
15
10
14
5
12.5
0
10.71
-5
8.75
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More Examples of the Law of Diminishing
Marginal Returns
Example #1: Learning curve when studying for an exam
Fixed Resources-Amount of class time, textbook, etc.
Variable Resources-Study time at home
Marginal return1st hour-large returns
2nd hour-less returns
3rd hour-small returns
4th hour- negative returns (tired and confused)
Example #2: A Farmer has fixed resource of 8 acres
planted of corn. If he doesn’t clear weeds he will get 30
bushels. If he clears weeds once he will get 50 bushels.
Twice -57, Thrice-60. Additional returns diminishes each
time.
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Tony’s Hat Store
Worksheet
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ACDC Leadership 2015