Lecture 10 - Chap 6 - Marginal product - law dim return.wmv

Uploaded by OnlineEcon on 08.03.2010

>> Alright, welcome back to lectures on economics
and we're moving on into chapter 6, we're talking
about productions and cost.
Now one of the things that we deal with when we're talking
about costs are the two types of costs that exists out there,
explicit costs and implicit costs
for running a particular business.
Explicit costs are costs that you expect.
They're actual dollar expenditures,
actual expenditures.
So when you're paying for something directly,
that's an explicit cost.
So wages that you're paying your workers,
rent that you're paying, utilities that you're paying,
taxes you're paying, these are all explicit costs.
Implicit costs are opportunity costs or money
that you might have made if you didn't run your own business.
So imagine if you will, if you didn't run your own business,
you could have gone, say, you know, been a check-out clerk
at you know, Walgreen's or Wal-Mart or something like that
and made, you know, 79 dollars an hour and made, you know,
like 20 or 30,000 dollars a year.
That's an implicit cost and when you're going
to determine whether or not you're really making money
in your business, you should take that into account
because if you're not making at least that much,
the 30,000 dollars a year in your business,
you're not really making a profit
or the way economists state it is by talking
about the difference between accounting profits
and economic profits.
Accounting profit is where the total amount of money
that you make from your business,
subtract all the total amount of money you spent
on your business, that's accounting profit.
That's whether or not your business didn't lose money.
Let's leave it at that stage.
Economic profit is where you take into account all
of those implicit costs, the extra money you could have made.
If your business makes that much money,
then it's truly making what's known as economic profit, okay?
So keep straight difference between accounting
and economic profit with explicit and implicit costs.
When we start talking about the next two or three chapters
about profit, realize we're always talking
about economic profit.
Your might-have-been dollars are included into--
in the profit margin that they're calculating when talking
about the different things that we--
that we're gonna net analyze when it comes to checking
out a particular market.
So what that leads us then to is saying, okay,
let's move on to the other stuff.
Let's start talking about production.
It seems like a reasonable thing to do, right?
Alright, so suppose I'm running a carwash and when it's just me
by myself, I can wash 5 cars in a four-hour span.
When I hired a friend, the two of us together,
we could wash 12 cars.
When we hired another friend, we could wash 18 cars
and we hired another friend on top of it, we could wash 22 cars
in an hour and this is what's often called a
production schedule.
This is what managers look at when they try to determine
who should I hire or whether or not I should hire more people.
They look at this kind of an analysis
to say how much production is gonna be going
on when these people are hired.
Now what we often deal
with [pause] is something called marginal production
or how much product did an additional worker create?
Marginal basically means how much increase was there
if I increment my regular unit by one.
So if I increase my workers by one,
how much did my production go up?
Well how much did I increase our production?
Well we weren't washing any cars before
and when I started working, we washed 5.
When we hired the second worker, the second worker,
their marginal production is how much did product increase?
It increased from 5 to 12.
It increased 7 units.
How much did the third person increment?
Well it incremented our particular carwash by 6
and we got the fourth one, it incremented by 4.
What this here, what this marginal product analysis shows
us is the law of diminishing returns.
Now what does the law of diminishing returns say?
Law of diminishing returns.
Basically the catch phrase that you use for this is,
"too many cooks spoil the broth,"
or the more people you hire,
the more people get in each other's way.
Now that's not necessarily always true, right?
I mean notice what started happening.
When I hired myself, I had an increase
in production of 5 units.
When I hired my friend, my first friend,
it increased my production by 7 units, right?
It's still going up.
When I hired my third friend, what happened?
We started talking, we started having little water fights,
we didn't wash as many cars.
We only increased by 6.
The total production still went up, right?
We still increased our production from 12 to 18
but the growth, it only grew 6 units instead of prior
which was 7 and notice what the fourth person did.
Yeah, it still made us wash more cars per hour but the increase,
only 4 units, alright?
So one of the things that you're gonna look
at when you're dealing
with production is the marginal production, how much does
that one person add to the overall output
for your particular business and if at some stage you get
to appoint where it's not enough, don't hire 'em, alright,
[noise] because you'll run into the law of diminishing returns
where too many cooks spoil the broth.