Econ 201 final

Demand (11)

*Demand schedule* - a table showing the relationship between the price of a product and the quantity of the product demanded. *Quantity demanded* - the amount of a good or service that a consumer is willing and able to purchase at a given price *Demand curve* - a curve that shows the relationship between the price of a product and the quantity of the product demanded. *Market demand* - the demand by all the consumers of a given good or service *Law of demand* - the rules that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease *Substitution effect* - the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes. Exp: when energy drink price falls, it will be substituted forr sports drinks or coffee *Income effect* - the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power exp: When the price of a good falls, the increased purchasing power of consumers' income will usually lead them to purchase a larger quantity of the good. A shift of a demand curve is an increase or a decrease in demand A movement along a demand curve is an increase or a decrease in the quantity demanded. *Variables that shift market demand* 1. income - consumers have available to spend affects their willingness and ability to buy a good. normal good - a good for which the demand increases as income rises and decreases as income fall inferior good - a good for which the demand increases as income falls and decreases as income rises 2. Prices of related goods - affect consumers' demand for a product, goods and services that can be used for the same purpose can be substituted. A decrease in the price of a substitute causes the demand curve for a good to shift to the left. An increase in the price of substitute causes the demand curve to shift to the right. Complements - goods and services used together. When two goods are complements, the more consumers buy of one, the more they will buy of the other. A decrease in the price of a complement causes the demand curve to shift to the right. An increase in the price of a complement causes the demand curve for a good to shift to the left. 3. Tastes - Refers to the many subjective elements that can enter into a customer's decision to buy a product. Exp: Sometimes trends play a role. Popularity of low-carbohydrate diets. When consumer's taste for a product increases, the demand curve will shift to the right, when consumers' taste for a product decreases, shifts to the left 4. Population and demographics - as the population increases, so will the number of consumers, and the demand for most products will increase. As demographics change, the demand for a particular good will increase or decrease because different categories of people have different preferences. 5. Expected future prices - exp: if enough consumers become convinced that houses will be selling for lower prices in three months, the demand for houses now will decrease. change in demand v. change in quantity demanded - a change in demand refers to the shift of the demand curve. A shift occurs if there is a change in one of the variables, other than the price. A change in quantity demanded - movement along the demand curve as a result of a change in the product's price

Supply and Demand together (equilibrium)

*Market equilibrium* - a situation in which quantity demanded equals quantity supplied *Competitive market equilibrium* - a market equilibrium with many buyers and many sellers *surplus* - a situation in which the quantity supplied is greater than the quantity demanded *shortage* - a situation in which the quantity demanded is greater than the quantity demanded How demand and supply affect equilibrium 1. d unchanged / s unchanged - no movement 2. d unchanged / s to the right - q increases , p decreases 3. d unchanged / s to the left - q decreases, p increases 4. d to the right / s unchanged - q increases , p increases 5. d to the right / s to the right - q increases , p inc or dec 6. d to the right / s to the left - q inc or dec, p increases 7. d to the left / s unchanged - q decreases , p decreases 8. d to the left / s to the right - q inc or dec, p decreases 9. d to the left / s to the left - q decreases , p inc or dec

Comparative Advantage (6)

*absolute advantage* - the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources *comparative advantage* - the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. *specialization* - you can show that someone can benefit from trade even though she is better than you are doing both tasks by the ppf. exp: even though your neighbor can pick more apples in a week than you can, the opportunity cost of picking apples is higher for her than for you because when she picks apples, she gives up more cherries than you do. So even though she has an absolute advantage over you in picking apples, it is more costly for her to pick aples than it is for you. The basis for trade is comparative advantage, not absolute advantage. Exp: fastest cherry pickers may not be doing that job because theyre comparative advantage in some other activity, and are better off specializing in that other activity autarky - a situation in which a country does not trade with another other countries terms of trade - the the ratio at which a country can trade its exports for imports from other countries countries gain from specializing in producing goods in which they have a comparative advantage and trading for goods in which other countries have a comparative advantage Why don't we see complete specialization: 1. not all goods and services are traded internationally 2. production of most goods involves increasing opportunity costs 3. tastes for products differ Where does comparative advantage come from 1. climate and natural resources 2. relative abundance of labor and capital 3. technology 4. external economies - reductions in a firm's costs that result from an increase in the size of an industry *tariffs *- taxes imposed - used to protect jobs, wages, industries quota - number limit voluntary export restraint - an agreement negotiated between two countries that places a numercial limit on the quantity of a good that can be imported by one country from other

Marginal Analysis (2)

*analysis that involves comparing marginal benefits and marginal costs* *marginal* - extra or additional *marginal benefit* - the utility you receive from more of something *marginal cost* - the cost from more of something Economists reason that the optimal decision is to continues any activity up to the point where the marginal benefit equals the marginal cost. Marginal benefit equals marginal cost only at competitive equilibrium and means that a product is economically efficient. marginal cost and average total cost *MC* = change in cost / change in output When marginal product of labor is rising, the marginal cost of output is falling. When the marginal product of labor is falling, the marginal cost of production is rising. average product of labor is the average of the marginal products of labor

Economic Surplus (CS, PS, ES) (2)

*consumer surplus* - the difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays demand curve to measure the total consumer surplus in a market. Consumers are willing to purchase a product up to the point where the marginal benefit of consuming a product is equal to the price. The sum of consumer surplus is equal to the rectangles of their highest price and the market price *Producer surplus* - the difference between the lowest price a firm would be willing to accept for a good or service the price it actually receives. The supply curve shows the willingness of firms to supply a product at different price. The sume of producer surplus is equal to the rectangles of their lowest price they accept and the market price. They measure the net benefit to consumers from participating in a market rather than total benefit. equilibrium in a competitive market results in the economically efficient level of output, where marginal benefit equals marginal cost. Results in the greatest amount of economic surplus, or total net benefit to society, from the production of a good or service. Economic efficiency - a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum *Economic surplus* - the sum of consumer surplus and producer surplus. Consumer surplus on top, producer below. *Deadweight loss* = the reduction in economic surplus resulting from a market not being in competitive equilibrium. Say priced higher, so quantity decreases. Only top right triangle would be consumer surplus. Producer surplus would equal the new rectangle in the old consumer surplus plus the old consumer surplus - the bottom half of the dead weight. Dead weight would be the triangle to the right of the new quantity.

Theory of Firms (3)

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Elasticity (5)

*elasticity* - a measure of how much one economic variable responds to changes in another economic variable. *Price elasticity of demand* - the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price. *elastic demand* - demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value. *inelastic demand* - demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value *unit-elastic demand* - demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value. *Midpoint formula* - to ensure that we only have one value of the price elasticity of demand between the same two points on a demand curve. (Final quantity - initial quantity) / ((initial quantity + final quantity)/2) / (final price - initial price) / ((initial price + final price)/2) *perfectly elastic demand* - the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals to infinity. A horizontal line *perfectly inelastic demand* - the case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero. a vertical line. When a necessary amount is absolutely needed. *determinants of the price elasticity of demand:* 1. availability of close substitutes - if a product has more substitutes available, it will have more elastic demand, if it has fewer substitutes, it will a more inelastic demand. 2. passage of time - the more time that passes, the more elastic the demand for a product becomes correlating to change in prices 3. luxuries versus necessities - the demand curve for a luxury is more elastic than the demand curve for a necessity. 4. definition of the market - the more narrowly we define a market, the more elastic demand will be. Exp: Gas at one station is more elastic than gasoline as a whole 5. share of the good in the consumer's budget - the demand for a good will be more elastic the larger the share of the good in the average consumer's budget. exp: table salt vs car *total revenue* - the amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number sold. When demand is inelastic, price and total revenue move in the same direction. When demand is inelastic, price and total revenue move inversely. *cross-price elasticity of demand* - the percentage change in quantity demanded of one good divided by the percentage change in the price of another good. exp: 1. if products are substitutes, then the cross price elasticity of demand will be positive. 2. if products are complements, then the cross price elasticity of demand will be negative. 3. if products are unrelated, then the cross price elasticity of demand will be zero. *income elasticity of demand* - a measure of the responsiveness of quantity demanded to change in income, measured by the percentage change in quantity demanded divided by the percentage change in income. three types 1. if income elasticity of demand is positive but less than 1, then the good is normal and necessity 2. if income elasticity of demand is positive and greater than 1, then it is normal and a luxury 3. if the income elasticity of demand is negative, then the good is inferior. *Price elasticity of supply* - the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price determinants: 1. ability and willingness of firms to alter the quantity the produce as price increases

Market Structure (12)

*perfect competition* - many firms, products identical, ease of entry is high, exp: growing wheat *monopolistic competition* - many firms, differentiated product, high easy of entry, exp: clothing stores *oligoploy* - few firms, identical or differentiated product, low easy of entry, exp: manufacturing computers *monopoly* - one firm, unique product, entry blocked, tap water *perfectly competitive market* - a market that meets the condition of many buyers and sellers, all firms selling identical products, and no barriers to new firms entering the market price taker - a buyer or seller that is unable to affect the market price Demand curve is perfectly horizontal Profit = Total rev - total costs Average rev - total revenue divided by the quantity of the product sold. marginal rev - change in total rev / change in quantity For a firm in a perfectly competitive market, price is equal to both average revenue and marginal revenue the marginal revenue curve for a perfectly competitive firm is the same as its demand curve 1. Profit maximizing level of output is where the difference between the total rev and cost are greatest. 2. Profit maximizing level of output is also where marginal revenue equals marginal cost. Profit = P - ATC *shutdown point* - the minimum point on a firms average variable cost curve; if the price fails below this point, the firm shuts down production in the short run long run competitive equilibrium - the situation in which the entry and exit of firms has resulted in the typical firm breaking even long-run supply curve - a curve that shows the relationship in the long run between market price and the quantity supplied *monopolistic competition* - a market structure in which barriers to entry are low and many firms compete by selling similar, but not identical products. sold, price, total rev (P*Q), average rev (TR/Q), Marginal rev (change in TR/ change in quantity). To maximize profit, marginal revenue has to equal marginal cost. *oligopoly* - a market structure in which a small number of interdependent firms compete. Barrier to entry - anything that keeps new firms from entering an industry in which firms are earning economic profit economies of scale - the situation when a firm's long-run average costs fall as it increases output *Game theory* - the study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profit of each firm depends on its interactions with other firms *payoff matrix* - a table that shows the payoffs for each firms earns from every combination of strategies by the firms *price leadership* - a form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change *monopoly* - a firm that is the only seller of a good or service that does not have a close substitute come from: 1. a gov blocks the entry of more than one firm 2. one firm has control of a key resource 3. there are important network externalities in supplying the good or service 4. economies of scale are so large that one firm has a natural monopoly *patent* - the exclusive right to a product for a period of 20 years from the date the product is invented *copyright* - a government granted exclusive right to produce and sell a creation *public franchise* - a gov designation that a firm is the only legal provider of a good or service *network externatlities* - a situation in which the usefulness of a product increases with the number of consumers who use it *natural monopoly* - a situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms a monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good 1. causes reduction in consumer surplus 2. increase in producer surplus 3. deadweight caused market power - the ability of a firm to charge a price greater than marginal cost. *collusion* - an agreement among firms to charge the same price or otherwise not to compete *horizontal merger* - merger between firms in the same industry *vertical merger* - merger between firms at different stages of production of a good *price discrimination* - charging different prices to different customers for the same product when the price differences are not due to differences in cost

Price Controls (2)

*price ceiling* - a legally determined maximum price that sellers may charge. Support from consumers. Causes a shortage - found between the intersections on the price ceiling. Producer surplus transferred to consumer. Deadweight loss in triangle. d *Price floor* - a legally determined minimum price that sellers may receive. if the price floor is risen from the market equilibrium, the consumer surplus is transferred to producers, there is a dead weight loss of a triangle. And the surplus is between the two points that intersect the price floor. Some people favor income tax credit instead of price floors, because they reduce the amount of tax that low-income wag earners would otherwise pay to the federal government.

PPF (7)

*production possibilities frontier* - a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technologies Used to analyze the tradeoffs for company. when graphing, you put the amount of quantity for one product and the amount for another product and plot that on the graph. efficent - when the combination of the point is using all available resources *inefficient* - when the the point is less than the maximum output *unattainable* - the production point is beyond the possibility. *opportunity cost* - cost of producing one more of one unit will mean not producing another unit Increasing marginal opportunity costs- increasing production by a given quantity requires larger and larger decreases in another quantity. The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity. Downward circle slope *economic growth* - resources available to an economy may increase. Both the labor force and capital stock, or amount of material may increase, making it possible to shift the production possibilities frontier. Technology may also change for one of the products and increase in that.

Production and Costs (5)

*production possibilities frontier* - a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology *opportunity cost* - highest valued alternative that must be given up to engage in an activity *marginal opportunity cost* - as the economy moves down the production possibilities frontier, it experiences increasing marginal opportunity costs because increasing automobile production by a given quantity requires larger and larger decreases in tank production The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity *marginal cost* - the change in a firm's total cost from producing one more unit of a good or service marginal cost / average total cost Average total cost = TC / Q Average Fixed cost = FC/ Q Average variable cost = VC / Q ATC = AFC+AVC Costs in the long run - all costs are variable, there are no fixed costs in the long run *long run average cost curve* - a curve showing the lowest cost at which a firm is able to produce given quantity of output in the long run, when no inputs are fixed. *Economies of scale* - the situation when a firm's long-run average costs fall as it increases output MC = greatest ATC = next greatest AVC = next AFC = lowest You can determine the total cost of producing a given quantity of pizzas if we know how many workers and ovens are required to produce that quantity of pizzas and what jill has to pay for those workers and pizzas. AVG total costs - usually a u shape Total costs - steady increase, than sharp increase *short run* - the period of time during which at least one of a firm's inputs is fixed long run - the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant TC = FC + VC *Opportunity cost* = the highest-valued alternative that must be given up to engage in an activity *explicit cost* -a cost that involves spending money *implicit cost* - a non-monetary opportunity costs *production function* - the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs

Supply (11)

*quantity supplied* - the amount of a good or service that a firm is willing and able to supply at a given price *Supply schedule* - a table that shows the relationship between the price of a product and the quantity of the product supplied *Supply curve* - a curve that shows the relationship between the price of a product and the quantity of the product supplied *Law of supply* - the rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied *Variables that shift market supply* 1. Price of inputs - anything used in the production of a good or service. Exp: if the price of an ingredient in energy drinks, such as guarana, rises, the cost of production of energy drinks will increase, and energy drinks will be less profitable at every price. The supply of energy drinks will decline, and the market supply curve for energy drinks will shift to the left. If the price of an input declines, the supply of energy drinks will increase, and the supply curve will shift to the right 2. Technological change - a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs. Positive change occurs whenever a firm is able to produce more output using the same amount of inputs, when productivity of workers of machines increases. As a result, when positive technological change occurs, the firm will increase the quantity supplied at every price, and shift to the right. Negative technological change could result, raise in firm's costs and good will be less profitable and shift to left. 3. prices of substitutes in production - alternative products that a firm could produce. EXP: pepsi produces pepsi and AMP. If price of colas fall, and become less profitable, Pepsi will shift some of their productive capability to AMP, and shift the supply to the right. 4. number of firms in the market - when new firms enter the market, the supply curve shifts to the right. When existing firms leave, the supply curve shifts to the left 5. expected future prices - if firm expects price of its product will be higher in the future, it has an incentive to decrease supply now and increase in the future. Therefore, supply curve shifts to the left now and than to the right in the future.

Quantitative Supply and Demand (1)

First, set Qd and Qs equations equal to eachother to find P. Once you find P, plug it back into the equation to find the quantity for apartments. You now have your quantity and price equilibrium point. To find the zeros / starting points of supply / demand line, you set each equation to zero and get them to calculate consumer / producer surplus Consumer surplus on top, producer surplus on the bottom The area to the left of the equilibrium point, forms a right triangle. the price equilibrium cuts the area into right triangle. so you take 1/2 base * height to equal the surplus. You do the same for the other surplus as well, making sure that you are subtracting and multiplying the appropriate bases. (consumer, top price - equilibrium) (producer, equilibrium - bottom price) Suppose there is a rent ceiling of amount per month. Substitute that amount into supply and get quantity. Than take new quantity and equal to it the quantity equation to get the new price. Area increases by the transfer from the producer surplus to consumer surplus, a rectange so base * height. You lose the area of the top, right triangle so 1/2 base * height (new price - equilibrium price) (equilibrium quantity - new quantity) producer surplus is the old value - the rectangle and the other right triangle. The deadweight = the two triangles areas added together, is the loss of economic efficiency

Taxes (3)

When the government taxes a good or service, however, it affects the market equilibrium for that good or service. Just as a price ceiling or price floor, one result of a tax is a decline in economic efficiency. Whenever a government taxes a good or service, less of that good or service will be produced and consumed. Exp: 4 dollars for pack of cigarette, 4 billion sold. Equilibrium point. If there is a 1 dollar tax on cigarettes, the supply curve shifts up 1 dollar. The new equilbrium point is 4.90 price and 3.7 billion sold. The federal gov will collect tx revenue equal to the tax per pack multiplied by the number of packs sold. there is a loss of consumer surplus because consumers are paying a higher price. There is a loss of producer surplus because they are now only getting 3.90. Therefore, the tax on cigaretes has reduced both consumer and producer surplus = to deadweight loss The deadweight loss from a tax is referred to as the excess burden or the tax. A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises *tax incidence* - the actual division of the burden of a tax between buyers and sellers in a market Determining tax incidence: exp: take the shift of the supply and determine the new equilibrium price. The difference between the new consumer and producer equilibrium with the tax is the tax incidence

Externalities (6)

a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. *negative externality* - exp: air pollution, generation of elc. the market may produce a quantity of a good that is greater than the efficient amount *positive externality* - exp: medican research. the market may produce a quantity that is less than the efficient amount externalities interfere with the economic efficiency of a market equilibrium. An externality causes a difference between the private cost of production and social cost, or the private benefit from consumption and the social benefit. *private cost* - the cost borne by the producer of a good or service *social cost* - the total cost of producing a good or service, including both the private cost and any external cost *private benefit* - the benefit received by the consumer of a good or service *social benefit* - the total benefit from consuming a good or service, including both the private benefit and any external benefit. q market and p market, with externality, there is a q efficient and p efficient. When there is a negative externality in producing a good or service, too much of the good or service will be produced at market equilibrium. Affects the supply curve. Raising the supply curve and creating a new point with less demand and a higher price. Creates a deadweight loss. when there is a positive externality in consuming a good or service, too little of the good or service will be produced at market equilibrium. Demand will increase, causing price and quantity to increase, showing there is a dead weight loss. *Market failure* - situations in which the market fails to produce the efficient levels of output *property rights* - the rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it What causes externalities: 1. externalities and market failures result from incomplete property rights or from the difficulty of enforcing property rights in certain situations *coase theorem* - under some circumstances, private solutions to problem of externalities will occur. Completely eliminating an externality usually is not economically efficient. exp: economically efficient level of pollution reduction, it is not zero When more than the optimal level of pollution is occurring, the benefits from reducing the pollution to the optimal level are greater than the costs. marginal cost of reducing pollution = marginal benefit from reducing pollution. Total cost of this decrease in pollution is equal to the area B under the marginal curve. The total benefits are greater than the total costs by an amount equal to the area of triangle A. Because the total benefits from reducing pollution are greater than the total costs, its possible for those receiving the benefits to arrive at a private agreement with polluters to pay them to reduce pollution Problem with private ways to solve externatlities: 1. transaction costs - the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of good or service. Coase argues if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities. Government policy to deal with externalities: 1. To deal with a negative externality in production, the government should impose a tax equal to the cost of the externality. This would be considered internalizing the externality. The marginal social cost and marginal private cost will rise, causing a market equilibrium with tax to have a lower quantity but a higher price, lowing the price paid by consumers and increasing the price paid by producers. 2. to deal with positive externality in consumption by giving consumers a subsidy, or payment, equal to the value of the externality. Government will cause students to internalize the externality for college education by paying them a subsidy equal to the external benefit. Demand goes up, creates a higher quantity and price, the increase = the amount of gov subsidy. Price paid by paid by consumers increases, prices received by producers decreases *Pigovian taxes and subsidies* - goverment taxes and subsidies intended to bring about an efficient level of output in the presnese of externalities. Cap and trade

Common Resources (3) combined above

a good is rival but not excludable. Exp: forest land in many countries is common resource. If one person cuts down a tree, no one else can use the tree. Bt since there is no property right to the tree, anyone can use it. *Tragedy of the commons* - the tendency for a common resource to be overused. overuse of a common resource. for a graph, social marginal cost rises by the true social cost of tree cutting. Quantity is lessed and benefit or cost rises. There is a deadweight loss. Sine the external cost ignored, they cut the wood to the actual, which is greater than the economic quantity.

Scarcity (2)

a situation in which unlimited wants exceed the limited resources available to fulfill those wants Everyday you make choices how you spend your limited income on the many goods and services available. The finite amount of time you have also limits your ability to attain your goals Scarcity requires trade-off Goods and services are scare. So too, are the economic resources, or factors of production sued to make goods and services

Public Goods (3) same as below

public good is both nonrivalrous and nonexcludable. Public goods are often supplied by a government rather than a private firm. Exp: national defense - you consuming it does not interfere with your neighbor consuming it and you cannot be excluded form consuming it. *Free riding* - involves individuals benefiting from a good without paying for it. determine the market demand for a good or service by adding up the quantity of the good demanded by each consumer at each price. demand curve or marginal social benefit curve - they will consume the same quantity. We do not add quantities at each price, instead we add the price each customer is willing to pay for each quantity of the public good. The value represents the total dollar amount consumers as a group will be willing to pay for that quantity of the public good. optimal quantity of public good: will occur where the marginal social benefit curve intersects the supply curve. The supply curve represents the marginal social cost. Sometimes use cost-benefit analysis to determine what quantity of a public good should be applied

Diminishing Marginal Returns (2)

the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline. *marginal product of labor* - the additional output a firm produces as a result of hiring one more worker. hiring workers raises the quantity of units produced, but after a certain amount, the increase in quantity is less than it was before. Soon to many get in the way, and the return would actually be negative, when marginal product is negative, the level of total output declines. Usually happens in short run decisions