Chapter 4: How Businesses Work

Production

The process of turning inputs into outputs.

Production Function tells you what the output is going to be. Table 4.1 gives the production function for a small lawn-mowing business. The 1st column is the number of hours worked, the 2nd column is the number of lawns mowed. Example= Two hours of work will result in four lawns mowed.

Define and apply the production function, average product, and marginal product.

Marginal product falls as the number of workers go up.

Diminishing Marginal Product?

Marginal Product of Labor

The extra amount of output the firm can generate by adding one more hour of labor or one more worker. MPL= Change in Output divided by the change in input.

Outputs

The goods and services that it sells to customers.

Production Function

The mathematical link between inputs and outputs. Example- Table 4.1 shows the production function for a lawn mowing business. The input represents the hours of labor and the output represents the number of lawns mowed using a hand mower. Vertical Axis= Output. Horizontal Axis= Input. Table 4.4 shows the two inputs Capital and Labor. With the capital input (power mowers) , the same number of labor hours results in more lawns mowed. Figure 4.3 shows the production function with a power mower and a hand mower. The production function also determines how much a business can produce, given its inputs.

Revenue

The money that businesses get for selling their products or services.

Cost

The money that the business pays for its inputs. The difference between revenue and cost is profits because Cost + Revenue=Profits.

Inputs

The resources, know-how, goods, and services that the business uses to produce the outputs.

Average Product

Another piece of information obtained from the production function. Average product is the output divided by the number of labor hours or by the number of workers in other words, output per hour or output per worker.

Outputs are the goods and services that it sells to it's customers. The input are the goods and services that the business uses to produce the outputs. This is when we hit production when you are turning inputs into outputs. Example- The outputs of a restaurant are the meals that it feeds to its customers. This means if the restaurant serves salads and steaks, then it's outputs would be the number of salads and steaks it serves during the week. One key input to the restaurant is human labor because the number of hours worked by the chefs in the kitchen, and the staff that brings you the food and cleans the restaurant. Other inputs include= The food ingredients, and the physical objects that make up the restaurant: the oven, and the refrigerators in the kitchen, the chairs and tables, and the roof. Last but not least the book or recipes for the dishes on the menu because without them the dishes would come out different each time.

Explain and apply the economic perspective on business operations.

Outputs are the goods and services that it sells to it's customers. The inputs are the goods and services that the business uses to produce the outputs. This when we hit production when you are turning inputs into outputs. Example- The outputs of the restaurant are the meals that it feeds to it's customers. This means that if the restaurant serves salads and steaks, then it's outputs would be the number of salads and steaks it serves during the week. One key input to the restaurant is human labor because the number of hours worked by the chefs in the kitchen and the staff that brings you the food and cleans the restaurant. Other inputs include the food ingredients and the physical objects that make up the restaurant: the oven, and the refrigerators in the kitchen, the chairs and tables, and the roof. Last but not least the book or recipes for the dishes on the menu because without them the dishes would come out different each time.

Explain and apply the economic perspective on business operations.

Suppliers of labor and other inputs supply those inputs to businesses creates outputs through production that they sell to their buyers. Flow of money= Revenue from selling outputs to the business and creates Profit Maximization = Cost of Inputs.

How does a business operate?

Adding more workers. Having more employees work more hours.

How does the production function determine how much extra output the business will create?

Land= Physical property that something or someone sits on. Example- Natural Resources-Coal. Labor=Employees/Workers. Capital= Physical plant + equipment that is used in the production process. Examples- Physical plant= Buildings, and Equipment= Machinery that is needed in the production process. Entrepreneurship= Idea (Innovation) of the production process. It also involves the risk taking. It is the people who start the business. Intermediate Inputs= Refers to any goods and or services purchased from other businesses for immediate use in the production. Example- All businesses need to buy electricity. Auto manufacturers need to buy steel. Business Know-How (Intellectual Capital)= All knowledge and technology necessary for the production process.

Inputs used in production?