The manager's decision about how many workers to hire is important.
Going from one worker to two increases output by 15 meals.
The second worker increased the number of meals produced from 5 to 15.
The marginal product is given an input by the change in output (10 additional with one additional unit of meals) divided by the increase in input (1 worker).
The total output is growing through eight workers, and we can see that in the three columns.
The rate of increase in the marginal product slows down after the first three workers.
The gains from specialization are decreasing.
There is a negative marginal product with the ninth worker going from 8 to 9.
There isn't much for an extra worker to do once the service stations are fully staffed.
Extra workers will get in the way of other workers completing their tasks.
Data from the second column of the table is used in the graph of total output.
At the first dashed vertical line, the slope of the total output curve rises until it reaches three workers.
Between three workers and the second dashed vertical line at eight workers, the total output curve continues to rise, though at a slower rate; the slope of the curve is still positive, but the curve becomes flatter.
The slope becomes negative once we reach the ninth worker.
It is not productive to have so many workers.
The production function and marginal product shows the total output rising in the green zone from zero to three workers, falling in the yellow zone between three and eight workers, and rising in the red zone after eight workers.
After the total output reaches eight workers, the marginal product becomes negative.
Total output increases if the marginal product is positive.
Total output falls when marginal product becomes negative.
Each worker's marginal productivity adds or subtracts from the firm's overall output.
The total output curve shows the rapid rise from 0 to 30 meals because each additional worker leads to increased specialization.
The marginal product begins to decline by the fourth worker.
The McDonald's restaurant is malfunctioning.
Because the size of the building and the amount of equipment don't increase, additional workers have less to do or interfere with the output of other workers.
In the green area, the marginal product and total output increase as the number of workers increases.
We reach the point of diminishing marginal product when we enter the yellow zone with the fourth worker.
At a slower rate, total output continues to rise.
The marginal product becomes negative when we enter the red zone with the ninth worker.
A rational manager wouldn't hire more than eight workers in this scenario because it would cause output to go down.
It's a mistake to assume that a firm should stop production when marginal product starts to fall.
Sometimes marginal product is declining but still high.
The diminishing marginal product begins with the fourth worker.
The fourth worker still makes 12 extra meals.
If Mcdonald's can sell 12 more meals than it pays the fourth worker, it will make more money.
A firm's decision- making process includes production.
If you've run a simple business like mowing lawns, you know that decision- making is required.
Every firm has to address these kinds of production related questions.
Cost is one of the major components of production.
Firms face cost related concerns.
The discovery process that leads to the answers is crucial.
Customers are lined up for snow cones at your small stand on a hot day.
The table shows your firm's short run production function.
When calculating this answer, you have to be careful.
When you have six workers, total output is maximized, but diminishing marginal return begins before you hire more.
There is a third column showing marginal product in the table.
When you hire the second worker, the marginal product is higher.
Each worker you hire has a lower marginal product.
The answer to the question is that diminishing marginal product begins after the second worker.
Business costs and production can be improved by assessing how much to produce and how to produce it more efficiently.
Production and cost considerations are different in the short and long run.
We begin with the short run because the majority of firms are most concerned with making the best short run decisions, and then we extend our analysis to the long run, where planning ahead plays a central role.
Some costs are unavoidable in the short run.
A lease on space or a contract with a supplier are unavoidable costs.
Costs can be variable or fixed in the short run.
The rate of output is what this means.
The variable costs include the number of workers the firm hires; the electricity the firm uses; the all- beef patties, special sauce, lettuce, cheese, pickles, onions, and sesame seed buns needed to create the Big Macs; and the packaging.
The restaurant doesn't need these items unless it has customers.
The amount of resources depends on the output of the restaurant.
You might be thinking that a firm should decide to produce at an output where its average variable costs are lowest; but be careful, you don't have all the facts yet.
Demand is added to our analysis to determine how much the firm should produce.
We are focused on the cost side.
No matter how many Mcdonald's Big Macs they sell, most of them are in the short run.
Overhead is the fixed costs of the costs associated with the building.
Rent, insurance, and property taxes are included.
Every business needs to know how much it costs to provide its products and services.
There are many ways to measure the costs of business decisions.
The total variable cost is in column 2 and the total fixed cost is in column 3.
When output is 0, the total variable cost starts at $0 and rises with production at an even rate, depending on output and the cost of ingredients that go into each Big Mac.
The increase in TVC is due to the fact that more workers and other inputs are needed to produce more output.
When output is 0, the total fixed cost starts at $100 and stays constant as output increases.
Overhead expenses include rent, insurance, and property taxes.
We assume that the amount is $100 a day.
The total cost is listed in column 4 when we add fixed cost and variable cost together.
The cost of producing a Big Mac can be determined by looking at the average cost of production.
The lowest total variable cost by the average variable cost is $1.67 if Macs are divided by 60 Big.
It can be an output.
The total variable costs in column 2 always go up, but the average variable cost goes down until 60 Big Macs are produced.
As the output rises, the total fixed cost by the output is determined.
The total fixed cost can be spread out by higher output levels.
Raising output is the best way to lower average fixed costs.
The total cost can be calculated by dividing it by the variable cost and average.
Let's look at the numbers to understand what fixed cost is.
After 60 Big Macs are produced, the average variable cost goes from $1.67 to $1.71 and the average fixed cost goes from $1.67 to $1.43.
The average total cost is down because of the decline in average fixed cost.
Spreading fixed cost across more production will eventually overwhelm the cost savings achieved.
If we compare the average total costs of making 70 Big Macs and 80 Big Macs, we can see this result.
The fall in average fixed cost is $0.18.
The benefit of higher output is removed by ATC.
It is time to see the cost relationships with graphs after walking through the numerical results in Table 8.3.
For the first 50 Big Macs, the total cost increases at a decreasing rate, reflecting the gains of specialization and comparative advantage that come from adding workers who concentrate on specific tasks.
The total cost curve increases at an increasing rate after 50 Big Macs.
The total cost curve rises more rapidly at high production levels because Mcdonald's restaurant has a fixed capacity and workers don't have any additional space to work in.
The total cost curve is the same as the total fixed cost and total variable cost curves.
The most important part of the story is not that.
Mcdonald's managers can look at total costs.
She can look at the average cost and compare it to the average cost at other businesses.
The total cost of labor and the average cost will not tell her anything about the cost of making Big Macs.
The total variable cost dictates the shape of the total cost curve.
The total cost curve increases at an increasing rate after 50 Big Macs.
The total fixed cost curve is flat.
The average variable and average total costs are always led by margins.
Average fixed cost, which has no variable component, continues to fall because total fixed costs are spread across more units.
She wants to hire more workers when the cost is less than expected.
It is important to know the marginal cost of hiring another worker.
When between 40 and 50 Big Macs are produced, the marginal cost falls to a minimum of $1.00.
Marginal cost is falling when output is less than 50 Big Macs because the marginal product of labor is increasing due to better teamwork and more specialization.
Business costs and production costs will soon follow suit.
The lowest point of the MC curve is before the lowest point of the ATC curve.
A manager who is concerned about rising costs would look to the MC curve as a signal that average total cost will eventually increase as well.
Variable cost is pulled down until sales reach 60 Big Macs.
MC is above AVC after that point.
ATC will fall until 70 Big Macs are sold.
The MC curve intersects the ATC and AVC curves at the minimum point.
ATC declines until 70 Big Macs are sold.
The decrease in ATC is a direct result of the decline in AFC.
The curve stops declining at 60 Big Macs.
Increased specialization and teamwork should lead to a decline in the average variable cost.
At some point, the advantages of continued specialization are overtaken by diminishing marginal product and the average variable cost begins to rise.
As long as average total cost is declining, the firm can lower its costs by increasing output.