CH. 7, Sec. 2Production Drives

Supply

Production is what makes it possible to meet consumer demand.

There is an opportunity cost in earning money as well…most people would rather play games, skate, watch TV, vacation, some other activity than work.

Oppt. Cost of working = less fun activities

Four Factors of Production= anything used to produce a g/s:

1) LAND2) LABOR3) CAPITAL4) ENTREPRENEURSHIP

Land = basic natural resource; examples: a farm, coal field, orange orchard, natural gas field

Labor = human factor of production—each of us is free to pick which field would be best for us; examples: teacher, truck driver, baseball player, nurse

Capital = previously produced g/s; examples: a sewing machine used in making jeans is formed of capital, office buildings, schools, factories, tractors = all are made of different forms of capital.

Entrepreneurship = managers and risk takers (owners). Few people can organize, direct, and control other people and resources efficiently and productively—they are willing to be risky in order to make a business successful!

In a free enterprise economy, like USA, most factors of production are owned by individuals.

You can use your labor and other factors of prod. to produce g/s in exchange for monetary and non-monetary rewards.

Production takes place as owners of the factors of production allocate their land, labor, capital, and entrepreneurship so that they make maximum profit!

Profit is the main motive and very important in guiding the production of g/s!

Measuring Production = businesses measure production or how much is supplied by time periods.

--they keep track yearly, monthly, weekly, or hourly

Counting Units vs. Dollars:Using units instead of dollars makes it easier to compare sales over time.

Look at pg. 161 Fig. 7-6 for example

Looking at the dollar rate is misleading because it shows that more money is being earned. What is doesn’t show is that less units are being sold. There is potential to make more profit. You must look at the units over a period of time!

Total Product = the units of output produced in a given time period.Output is the FINAL PRODUCT

Average Product = the number of units of output produced per unit of input

Units of OutputAverage Product = Units of Input

Think of “input” as one unit of workday

EX: Lumin Company makes lamps.

1 unit of input = 1 workdayDuring 6 years—88 people worked 5 days a week for 50 weeks a year.

Labor units in years:88workers x 5 days/wk x 50wks/yr = 22,000 workdays

_____________________________22,000 = total input in 6th year124,727 = # of lamps produced in 6th year

Average Product = 124,727/22,000 =5.669 lamps per day

Which means that each worker produced almost 6 lamps per day.

Marginal Product = the amount that total product increases or decreases as a result of adding one additional unit of input. Change in Output

Marginal Product =Change in Input

Diminishing Marginal Product = the principle that as more of one input is added to a fixed amount of other inputs, the marginal product decreases.

In other words, output increases less rapidly as additional units of input are used. Too much crap makes a cluster; therefore, less production!

Number of Number of EmployeesEmployees

Total Total ProductProduct

Marginal Marginal Product Product ΔΔ OUTPUTOUTPUTΔΔ INPUT INPUT

1010 100100 100 100 ÷10 = ÷10 = 1010

2020 160160 60 60 ÷ 10 = 6 ÷ 10 = 6

3030 180180 20 20 ÷ 10= 2÷ 10= 2

4040 160160 -20 -20 ÷ 10 = -2÷ 10 = -2

Long Run(LR) = a period during which the amounts of all inputs can be changed. (not based on the calendar either)

EX: a power company might need ten years or more to increase plant capacity

Scales of Production = the overall level of use of all factors of production.

When all units increase, the scale of production increases.

If all increase then the diminishing marginal product is no longer valid

EX: if Lights Unlimited kept enlarging its store, more employees could be hired without a problem of overcrowding.

Returns to Scale = the relationship between changes in the scale of production and the corresponding change in the amount of output.

Some products are more efficiently produced on a large scale—like cars, steel and home appliances= increasing returns to scale. This means the levels of output increase more rapidly than the use of inputs.

EX: if the use of inputs double then output will more than double.

Constant Return to Scales = 20% more input causes 20% more output

Decreasing Returns to Scale = 50% increase in all inputs but only 30% increase in output.