lesson 12 thinking outside the margin - power point - duke
TRANSCRIPT
Domino’s Pizza Ad
Domino’s Pizza Delivery SpecialThis Week Only!
One Large Pizza$ 9.95
Second Large Pizza$ 5.00
Explain why this is a good deal for the consumer and Domino’s Pizza.
One Large Pizza$ 9.95
How much does it cost to make one large pizza?
What’s the profit?$4.95
$1.00
+ $4.00
= $5.00
When I say…..You say…
Second Large Pizza$ 5.00
How much does it cost to make the second large pizza?
What’s the profit?$4.15
$ .85+ $ 0
= $.85
This is the marginal
(additional) cost of
producing one extra
pizza.
Would you rather?......
Sell one pizza for a $4.95 profit
Or
Two pizza’s for a $9.10 profit
For Dominos Pizza- the marginal benefit (profit from the second pizza) outweighed the marginal cost (.85) to producing the additional pizza. They are still very profitable!
For the consumer- the marginal benefit (what you will do with the extra pizza, out weighs the marginal cost ($5.00).
Thinking at the Margin
Describe an example of where you have
thought at the margin?
Change
N/A
$54
$33
$15
$10
$5
Burger Queen …
How many employees should I hire?
Titan Burger has 3 jobs:
1. Cash Register/Drink Prep2. Fry Engineer3. Burger Architect
Employees # of Burgers Price Total Revenue
1 8 x 2.00 = $16.002 17 x 2.00 = $34.003 27 x 2.00 = $54.00 4 38 x 2.00 = $76.00 5 46 x 2.00 = $92.006 40 x 2.00 = $80.00
7 30 x 2.00 = $60.00
At the 5th worker, Titan Burger has a point of diminishing marginal return. Why? Because hiring the 4th worker added 11 burgers (marginal product of labor), and hiring the 5th worker added only 8 burgers. Therefore, the output of the 5th worker was less than the 4th worker.
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4
2 10
3 17
4 23
5 28
6 31
7 32
8 31
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4 4
2 10
3 17
4 23
5 28
6 31
7 32
8 31
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4 4
2 10 6
3 17
4 23
5 28
6 31
7 32
8 31
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4 4
2 10 6
3 17 7
4 23
5 28
6 31
7 32
8 31
Increasing Marginal Return
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4 4
2 10 6
3 17 7
4 23 6
5 28
6 31
7 32
8 31
Diminishing marginal return. 3rd worker adds 7, while adding 4th worker only adds 6.
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31
7 32
8 31
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32
8 31
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31
Marginal Product of Labor(additional)Labor(number of workers)
Output (beanbags per hour)
Marginal product of labor
0 0 ---
1 4 4
2 10 6
3 17 7
4 23 6
5 28 5
6 31 3
7 32 1
8 31 -1
At 4 workers, this firm has a situation of diminishing marginal return.
As each additional worker is hired, the cost of production must be taken into consideration.
Labor is the #1 cost of production in theUnited States
Fixed cost- a cost that does not change with quantity produced. Same cost regardless of level of production.
1. Rent2. Salary Employees3. Insurance4. Property Tax
Variable cost- a cost that rises or falls depending on the amount produced.
1. Hourly Pay2. Raw Materials 3. Electricity/Utilities4. Advertising
* Fixed costs and variable costs = total cost
How do we calculate total profit?
Formula TR= (PXQ)-TC= (FC+VC) Total Profit
Total Profit for the surf shop?
Total Revenue (P x Q) = $45, 778.50
Variable Costs $ 1,428.00Fixed Costs $ 2,585.00
Total Revenue (TR) $45,778.50
Total Cost (FC + VC) - $4,013.00
Profit $41,765.50
Cost of Production for Beach Balls
Beach Balls (per hour) Quantity
Fixed cost
Variable cost
Total cost (fixed cost + variable costs)
Marginal cost
Marginal revenue (market price)
Total revenue (MRxQ)
Profit (total revenue – total cost)
0 $36 $0 $36 ---- $24 $0 $-36
1 36 8 44 24 24 -20
2 36 12 48 24 0
3 36 15 51 24 21
4 36 20 56 24 40
5 36 27 63 24 57
6 36 36 72 24 72
7 36 48 84 24 84
8 36 63 99 24 93
9 36 82 118 24 98
10 36 106 142 24 98
11 36 136 172 24 92
Cost of Production for Beach Balls
Beachballs (per hour) Quantity
Fixed cost
Variable cost
Total cost (fixed cost + variable costs)
Marginal cost
Marginal revenue (market price)
Total revenue (MRxQ
Profit (total revenue – total cost)
0 $36 $0 $36 ---- $24 $0 $-36
1 36 8 44 8 24 X 1 = 24 -20
2 36 12 48 24 0
3 36 15 51 24 21
4 36 20 56 24 40
5 36 27 63 24 57
6 36 36 72 24 72
7 36 48 84 24 84
8 36 63 99 24 93
9 36 82 118 24 98
10 36 106 142 24 98
11 36 136 172 24 92
Cost of Production for Beach Balls
Beachballs (per hour) Quantity
Fixed cost
Variable cost
Total cost (fixed cost + variable costs)
Marginal cost
Marginal revenue (market price)
Total revenue (MRxQ
Profit (total revenue – total cost)
0 $36 $0 $36 ---- $24 $0 $-36
1 36 8 44 8 24 24 -20
2 36 12 48 4 24 X 2 = 48 0
3 36 15 51 24 21
4 36 20 56 24 40
5 36 27 63 24 57
6 36 36 72 24 72
7 36 48 84 24 84
8 36 63 99 24 93
9 36 82 118 24 98
10 36 106 142 24 98
11 36 136 172 24 92
Cost of Production for Beach Balls
Beachballs (per hour) Quantity
Fixed cost
Variable cost
Total cost (fixed cost + variable costs)
Marginal cost
Marginal revenue (market price)
Total revenue (MRxQ
Profit (total revenue – total cost)
0 $36 $0 $36 ---- $24 $0 $-36
1 36 8 44 8 24 24 -20
2 36 12 48 4 24 48 0
3 36 15 51 3 24 X 3 = 72 21
4 36 20 56 24 40
5 36 27 63 24 57
6 36 36 72 24 72
7 36 48 84 24 84
8 36 63 99 24 93
9 36 82 118 24 98
10 36 106 142 24 98
11 36 136 172 24 92
Cost of Production for Beach Balls
Beachballs (per hour) Quantity
Fixed cost
Variable cost
Total cost (fixed cost + variable costs)
Marginal cost
Marginal revenue (market price)
Total revenue (MRxQ
Profit (total revenue – total cost)
0 $36 $0 $36 ---- $24 $0 $-36
1 36 8 44 8 24 24 -20
2 36 12 48 4 24 48 0
3 36 15 51 3 24 72 21
4 36 20 56 5 24 96 40
5 36 27 63 7 24 120 57
6 36 36 72 9 24 144 72
7 36 48 84 12 24 168 84
8 36 63 99 15 24 192 93
9 36 82 118 19 24 216 98
10 36 106 142 24 24 240 98
11 36 136 172 30 24 264 92
What is the marginal cost of producing the 6th beach ball?
9What is the marginal cost of producing the 9th beach ball?
19What is the total revenue of producing 4 beach balls per hour?
96What quantity of output maximizes profits for this firm?
10 MC=MR Chart
Cost of Production for Beach Balls
Beachballs (per hour) Quantity
Fixed cost
Variable cost
Total cost (fixed cost + variable costs)
Marginal cost
Marginal revenue (market price)
Total revenue (MRxQ
Profit (total revenue – total cost)
0 $36 $0 $36 ---- $24 $0 $-36
1 36 8 44 8 24 24 -20
2 36 12 48 4 24 48 0
3 36 15 51 3 24 72 21
4 36 20 56 5 24 96 40
5 36 27 63 7 24 120 57
6 36 36 72 9 24 144 72
7 36 48 84 12 24 168 84
8 36 63 99 15 24 192 93
9 36 82 118 19 24 216 98
10 36 106 142 24 24 240 98
11 36 136 172 30 24 264 92
Back
Bringing it All Together
With a partner, come up with your own company. First, determine the total monthly salary of your management. Next, determine the cost of your hourly employees. Then decide on the market price of the merchandise you are selling. Place these numbers in the appropriate boxes. Finally, compute the marginal cost, quantity produced, marginal product of labor, total revenue, and the profit. Show your work!