Introduction to EconomicsJohnstown High School

Mr. Cox

Production

Introduction to ProductionWhen thinking about Supply and Demand,

a critical component that must be understood is the costs and operations behind producing goods.

Inputs – resources; materials needed to produce an..

Output - quantity of goods or services produced in a given time period, by a firm, industry, or country (i.e. finished goods)

Resources – Factors of ProductionNatural resources (Land)– “free gifts of nature”

Land, minerals, oil, forests, air, and timberCapital Resources – “manufactured aids to

production”Tools, machines, equipment, factoriesThings used in producing goods and services and getting

them to consumers.Human Resources (Labor)– “mankind’s physical and

mental talent”These are the skills people have that are used to produce

goods and services. Entrepreneur – the individual who combines the

factors of production in order to produce a good or service.Risk taker, policy maker, and innovator

Circular flow of income and output

What does the circular flow model show us?Why is a relationship between the factor

market and the product market necessary for the economy to stay strong?

What are the bean bag firms inputs? Workers and materials

(cloths, thread, and beans)

What is the basic question that a business owner has to answer in regards to labor?

How many workers to hire?

Do more workers always mean an increase in output? Explain. No, at some point

output drops (not enough capital)

What is Marginal Product of Labor?

Change in output from hiring one more worker

What is the marginal product of labor for the second worker?

6 (up from 4)1st=4 2nd=10

Why does that second worker add more to output than the first? Start to

specialize jobs

CookWaiter

Dishwasher

At what point does the marginal product of labor start to decrease?

Why?-Not enough to do

The 4th worker

Not enough tasks (only 3) so people with down time.

What is capital?

Humans made resource that is used to produce other goods.

What is the factories capital?

Sewing machine and pair of scissors

What happens to product of labor if a factory hires way too many people?

Marginal product of labor goes negative

What are the two categories of costs?

Teachers Salary

*Salary

All Others

*Hourly

Fixed and variable

What is Fixed Cost?

Cost that doesn’t change

What does it involve?

Give a few examples.Rent, machine repairs, property taxes, and salaries

Product facility, building and equipping factory, office

Store or restaurant

What is Variable Cost?

Costs rise and fall depending on quantity produced

What do they involve?

Give a few examples.

Raw materials and some labor

Labor-# of workers change, electricity, and heating

Labor

What are its variable costs?

Workers

Fabric

Beans

What do you get when you add the two costs?

Total costs

What is Marginal Revenue? Additional income from

selling one more unit

What happens to the marginal revenue when the 11th bean bag is produced?

Stays the same

No gain is made

Next one will take from profits

T/F The company would be better off producing less and keeping its costs down.

True, more economical

Should a factory losing money continue to produce goods and lose money?

Yes, will lose less $ then being shut down and losing fixed costs

Fixed cost still have to be paid(rent, loan, etc…)

Graphing Production PossibilitiesThe Production Possibilities Frontier (PPF)

is a graph that shows all possible combinations of two goods when an economy is producing at full potential.It does not actually show reality, since it

assumes only two goods are produced.It is a simplification that shows what sort of

trade-offs would be made in reality.It only shows what can be produced – not

what would be consumed.

PPF for the Country

Guns

Butter

A point on the graph represents how much of each item is being produced.

800

800

PPF for the Country

Guns

Butter

The frontier shows the limit of what can be produced – all possible combinations when all resources are fully utilized.

PPF for the Country

Guns

Butter

1500

All resources are being used to produce guns.

PPF for the Country

Guns

Butter

1500

2000

All resources are being used to produce butter.

Usually a point is chosen where both items are being produced:

PPF for the Country

Guns

Butter

1100

1500

Production may occur anywhere on or within the frontier.It may NOT occur beyond the frontier–

there are not enough resources to do so.

PPF for the Country

Guns

Butter

AAt point A (and at any point on the frontier), production is EFFICIENT.

Efficient production means that all resources are being fully employed to produce the most goods and services possible.Therefore it is impossible to produce more

of one item without producing less of the other.

PPF for the Country

Guns

Butter

B

At point B (and at any point inside the frontier), production is INEFFICIENT.

Inefficient production means not all resources are being fully employed – it is still possible to increase production of both goods.

This could occur during a recession or depression, or in a developing country.

The PPF can be used to show tradeoffs.Any two or more points on the frontier

represent tradeoffs.

PPF for the Country

Guns

Butter

A

B

A and B represent tradeoffs. A produces more guns, B produces more butter.

The PPF can be used to show the opportunity cost of choosing one alternative over the other.

PPF for the Country

Guns

Butter

A

B

1400

800

1700600

The opportunity cost of A equals the decrease in butter: 1100 units.

PPF for the Country

Guns

Butter

A

B

1400

800

1700600

The opportunity cost of B equals the decrease in guns: 600 units.

The PPF can also show economic growth by moving outward.This may occur due to additional resources,

increasing population, or new technology.

PPF for the Country

Guns

Butter

Growth

ReviewAny point on the graph shows how much of

both goods is being produced.Efficiency is shown by whether the point is on

the curve (efficient) or within the curve (inefficient).

Tradeoffs are shown by any two points on the curve.

Opportunity cost is shown by the decrease in one good when the other is increased.

Growth is shown by the frontier moving outward.

Production Possibility Graphs

Graphing the documentary “Broke…”

https://www.youtube.com/watch?v=va2qj4Zv4QM

Production Possibility Graphs Decide which goods and services to examine from the film.

The film will outline the choices made by some professional athletes. You will select and highlight some of those choices.

A represents all of one choice, B represents all of another choice. A will be the choice they made, B will be another choice either stated they

could have made, or one you think they could have made. Your graph will have a description of the following terms in

regard to the film:1. Production Possibility Frontier – the connecting line between A and B.2. Trade-offs – differing choices made because resources are scarce.3. Efficiency – using resources in such a way as to maximize production.4. Underutilization – using fewer resources than the economy is capable of

producing.

Define these terms from “Broke…”Sudden Wealth Effect…Draped…Bling Bling…How much for a “Grand Slam Package?”Three examples of “Mo Money, Mo

Problems…”

Class discussion questions for the documentary “Broke”1. Describe the premise of the documentary.2. List the problems incurred and described by the

athletes.3. What are the root issues with these athletes? Are

the stories they tell the problem, or are they the symptom?

4. Do other socioeconomic levels experience similar issues on differing scales? Why or why not?

5. How could the problems be handled differently?6. Could seniors in high school put themselves into

this situation on a relative scale?7. How can you prevent this in your life?