Production (HL only)

Introduction

This page begins unit 2.11 and focuses on the relationship between output, time and variable inputs into a business. This includes the concept of diminishing returns. A simple exercise to start off this concept is for your students to imagine that they start a business selling cup cakes. On their own they can bake perhaps 50 each day, to take into school and sell. Demand is rising so they ask a friend to help out. Working together they can expand production quickly - making more than 100 cakes each day as they divide up the tasks and specialise. However, as more and more workers are added the return on each additional worker falls.

This page also includes a fun activity, using the concept, simple equipment and the students as interacting participants. There are a number of ways of completing this activity but this is my version of it.

Enquiry question

What is the difference between total, average and marginal output levels. What is the law of diminishing returns?

Teacher notes

Lesson time: 70 minutes

Lesson objectives:

Define total product, average product and marginal product and construct diagrams to show their relationship.

Understand the law of diminishing returns.

Calculate total, average and marginal product from a set of data and / or diagrams. While these are no longer explicitly included on the curriculum your students will need to understand the concepts so that they can calculate TR, MR and AR.

Explain the relationship between the product curves (average product and marginal
product) and the cost curves (average variable cost and marginal cost), with reference to the law of diminishing returns.

Teacher notes:

1. Beginning activity - begin with the opening question and allow 5 minutes for discussion

2. Processes - technical Vocabulary - the students can learn the key concepts through the short class handout and the activities provided. (35 minutes)

3. Application of the concept to the central economic theme of sustainability. Activity 4 should be used as a reflection exercise. (10 minutes)

4. Final reflective activity - diminishing returns game, ask students to reflect on the difficulty of buying and selling water in the market place. (20 minutes)

Beginning question

What is the difference between production / output and revenue in economics?

An easy response to answer, output / production is measured in units while revenue measures the money coming into a business i.e. quantity of output sold x selling price.

Key terms:

Total product is the total output produced by a firm, measured in units.

Average product is the average output produced per unit of variable cost. This is calculated by total product divided by the variable factors (V).

Marginal product is the additional output generated when one more variable unit is added to the production process. This could be an extra unit of labour or capital.

Law of diminishing returns - the law that states as you continue to add increasing variable factors to a fixed factor the average output and marginal output will eventually fall. After this point total product may continue to rise but at a slower rate.

The activities on this page are available as a PDF file at: Diminishing returns handout

Activity 1

Watch the following short video and then answer the following questions:

Questions:

(a) The video compares fixed and variable costs.

Provide and example of a fixed cost identified in the video

Oven to cook the pizza

Provide an example of a variable cost from the video

Workers

Why does Mr Clifford suggest that as the kitchen initially adds workers to the production process the output per worker rises?

The benefits obtained from specialisation

Why does he suggest that eventually, however, the output per worker will fall as more are added to the production process?

The law of diminishing returns i.e. workers get in each others way e.t.c.

What is the short run in economics?

When at least one cost is fixed, in this case the oven and kitchen

What is the long run in economics?

When all costs are variable, e.g. eventually the oven will wear out and need to be replaced and becomes a variable cost

Activity 2: Paper three type

Complete the tables provided by completing the gaps.

The marginal product figures are measured by calculating the difference in output after a new worker is added to the production process.

Quantity of labour (V)	Total product (TP)	Average product (AP)	Marginal product (MP)
0	0	0
			10 (change in TP / V) i.e. 10 / 1
1	10	10
			20 (change in TP / V) i.e. 20 / 1
2	30	15
			21 (change in TP / V)
3	51	17
			13 (change in TP / V)
4	64	16
			11 (change in TP / V)
5	75	15
			9
6	84	14
			7 (change in TP / V)
7	91	13

Activity 3

Number of workers	Total product (TP)	Average product (AP)	Marginal product (per worker)
20	0	0
			60 (change in TP / change in the number of workers) i.e. 600 / 10
30	600	20 (TP/workers) e.g. 600 / 30
			40 (400 / 10)
40	1,000	25
			40
50	1,400	28
			22
60	1,620	27
			13
70	1,750	25
			1
80	1,760	22
			(5)
90	1,710	19

Activity 4: Applying the law of diminishing returns to sustainability

Watch the following short video and then answer the questions that follow:

Why does the video support the notion that the law of diminishing returns is reducing the ability of governments to grow the economy and exploit new energy reserves. Does this support the view held by some that the world may have already reached 'peak oil' and will need to invest in alternative energy resources in the future.

Peak oil theory, a contention that conventional sources of crude oil, as of the early 21st century, either have already reached or are about to reach their maximum production capacity worldwide and will diminish significantly in volume by the middle of the century. “Conventional” oil sources are easily accessible deposits produced by traditional onshore and offshore wells, from which oil is removed via natural pressure, mechanical walking beam pumps, or well-known secondary measures such as injecting water or gas into the well in order to force oil to the surface.

Proponents of peak oil theory do not necessarily claim that conventional oil sources will run out immediately and create acute shortages, resulting in a global energy crisis. Instead, the theory holds that, with the production of easily extractable oil peaking and inevitably declining (even in formerly bounteous regions such as Saudi Arabia), crude-oil prices are likely to remain high and even rise further over time, especially if future global oil demand continues to rise along with the growth of emerging economies such as China and India.

Activity 5: Diminishing returns game

For this game you will need two buckets, a number of tennis balls and a whiteboard to record results of the exercise. One student becomes the timekeeper and a second the output recorder. All other students that participate become workers on the 'production line'.

The buckets are set up approximately 15 feet apart and the first 'volunteer' is told they need to pick up one ball at a time and run to the other bucket, place it inside and then return to the first bucket to collect the next ball. The goal is for students to transfer as many tennis balls as possible from the first bucket to the second within 30-seconds. A worker can only handle one ball at a time and any balls dropped on the floor cannot be retrieved.

At the end of this time the total number of balls transferred from bucket one to bucket two are counted and recorded on the schedule. The balls are then all returned to the first bucket ready for the next round. A second worker is then added and each must use the production technology of 'handing' the ball to the other worker. In this way, when there are two workers, they each only have to take the ball half the distance.

As further workers join the production line each worker has less distance to travel and very quickly they are able to stand still and just pass the balls from one worker to the next. Each student must handle every ball on each run. At the end of each thirty second period the balls are counted and returned to the first bucket. The work that each successive group of workers completes constitutes one point of the production function and each series of runs constitutes a short run production function. Continue the 30-second runs of the game until negative returns have been demonstrated.

Once the activity has been completed each student can complete a table illustrating the results under the following headings:

Production schedule

Labour	Total product	Average product	Marginal product
0	0	0
1
1
1
2
1
3
1
4
1
5
1
6

Extensions to the basic game

Further discussion may include changing the variation of fixed inputs, for example a bigger or smaller workspace, different methods of production (technology) and then determining whether the alternative methods led to higher output relative to the number of workers. Some examples of alternative methodologies include making all the workers run from bucket to bucket rather than handing the ball through the chain or rolling the balls along the ground.

The final question / discussion point of this lesson is 'what would shift the production function' e.g. more workers or capital (more buckets and balls).

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