Download MM2 6.0 part 3

Marketing
Management 6.01
Part 3
The Production Process
Assembly Line Video
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http://www.popmodal.com/video/592/ILove-Lucy-Lucy-and-Ethel-WrappingChocolate
The Production Process
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All business organizations are
involved in some form of production.
All businesses use resources (land,
labor and capital) to provide an end
user with a good or service.
The supply (output) produced by a
company depends on the amount of
input that it puts in which varies based
on their resources (capital, equipment,
and number of employees)
There are several other factors that
have an effect on a business’s output,
such as productivity.
Stages of Production
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The Production Process consists of the procedures
used to turn materials into finished goods
1. Primary Production - This involves the extraction of
raw materials from the earth. It includes such things as
farming (agriculture), mining (coal, metals, precious
stones), quarrying (extracting gravel, stone, etc.), fishing
and forestry.
2. Secondary Production - involves transforming raw
materials into goods. There are two main kinds of goods:
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Consumer goods – e.g. washing machines, DVD players.
Industrial / capital goods – e.g. plant and machinery etc. Used by
businesses themselves during the production process
3. Tertiary Production – This involves providing services,
such as cleaners, taxi drivers, lawyers, banking services,
education, baby sitting, And many others.
In production the addition of
workers…
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Could help a business or hurt a business.
Increasing returns: Adding resources or workers will
result in an increasing ratio of product (marginal return)
Diminishing returns: Adding resources or workers will
result in an decreasing ratio of product (marginal return)
Law of diminishing returns: When increasing amounts of
one factor of production are employed in production
along with a fixed amount of some other production
factor, after some point, the resulting increases in output
of product become smaller and smaller.
Marginal product: The amount of increase or decrease
that occurs when an additional worker is used in the
production process.
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The table to the right presents
the hourly production of Tacos
as Waldo's TexMex Taco
World employs different
quantities of labor. The first
column is the number of
workers, the second is the
total hourly production of
Tacos and the third column is
the marginal product
generated by each additional
worker.
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For the first 2 workers marginal
product increases. This reflects
increasing marginal returns.
For the 3rd worker on, however,
marginal product decreases. This
reflects decreasing marginal returns
and the law of diminishing marginal
returns. The marginal product of the
3rd worker is 25 tacos, compared to
30 tacos for the 2nd worker. The
marginal product of the 4th worker
then declines to 20 tacos. For the 5th
worker, the marginal product falls to
15. For each additional worker, the
marginal product declines. Marginal product eventually reaches zero
for the 8th worker and even declines for
the 9th and 10th workers
How does production relate to profits?
Terms 
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Marginal cost: The additional costs it takes to
make 1 more unit of output.
Total revenue: The revenue received by a firm
for the sale of its output. Total revenue is the
price times quantity--the price received for selling
a good times the quantity of the good sold at that
price
Marginal revenue: The change in total revenue
resulting from a change in the quantity of output
sold. Marginal revenue indicates how much extra
revenue a firm receives for selling an extra unit of
output. It is found by dividing the change in total
revenue by the change in the quantity of output.
Calculating Marginal Revenue
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The marginal revenue received by a firm is
the change in total revenue divided by the
change in quantity, often expressed as this
simple equation:
marginal revenue = change in total revenue
change quantity
Production Keypoints
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Describe the impact of the law of diminishing
returns on production decisions.
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The addition of more employees can lead to an
increase in output but at some point it can have a
negative effect when more units are not produced
or a decrease occurs.
Explain how total revenue and marginal
revenue are used to determine the amount of
output that will generate the most profit.
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Total revenue is all the income generated by
selling the products the company makes
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Marginal revenue helps the company calculate
whether to make a few more items
Marginal revenue is the extra revenue generated
when a firm sells one more unit of output. It plays a
key role in the profit maximizing decision of a firm
relative to marginal cost.
A company must determine if the additional costs are
worth spending.
Based on the information in the following chart,
determine the point at which the law of diminishing
returns begins to take effect:
Number of Workers
Units produced
1
12
2
26
3
40
4
48
5
54
6
58
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Four workers. The law of diminishing returns states that,
at some point, continuing to add workers will reduce
overall productivity. This occurs because there are
limited amounts of other variables such as work space
and raw materials. In the chart, the law of diminishing
returns begins to take effect when the fourth worker is
hired. Production increased by 14 with the addition of the
second worker, and again by 14 with the addition of the
third worker. However, the addition of the fourth worker
only increased production by 8, which is the beginning of
the decline. Adding the fifth and sixth workers created an
even greater decline in productivity.