Economics Lesson Plan 2-6:

The Production Function and the Law of Diminishing Returns

.
Class: Economics
Unit: Unit two
Time: 1-2 class periods

Target Delaware State Content Standards:

Economics Standard One: Students will analyze the potential costs and benefits of
personal economic choices in a market economy [Microeconomics].

9-12: Students will demonstrate how individual economic choices are made within the context of a market
economy in which markets influence the production and distribution of goods and services.
Rationale:
This lesson examines how businesses can select the Optimal Input Combination; The
combinations that enables firms to produce whatever output they decide upon at the
minimum cost for the output.

This lesson will examine the simpler, short-run case, in which a firm can vary the
quantity of only one input, while all other input quantities are already determined. This
assumption vastly simplifies the analysis and enables us to answer two key questions.
1. How does the quantity of input effect the quantity of output.
2. How can the firm select the optimal quantity of an input.

Lesson Objectives:
1. Explain the difference between fixed and variable costs.
2. Describe the difference between the short-run and long-run.
3. Compute the average and marginal physical product for a single input given data on
total output at different input level.
4. Explain the “Law of diminishing marginal returns”
5. Explain how total product, average product, and marginal product can be computed.
6. Explain the relationship between total product, average product and marginal product
curves.
7. Explain the theory of production
8. Describe the Three stages of production.

Terms:
Theory of production
Law of variable proportions
Short-run
Long-run
Production function
Total product
Marginal product
Stages of production
Diminishing returns
Material Needed:
- 2 reams of 8”by 11” computer paper
- 4 empty desks to represent factories
- 2 staplers
- 2 pairs of scissors
- 2 black markers
- 2 full packs of staples
- Activity 2-6-1: The Production Function and The Law of Diminishing
Marginal Returns
- Activity 2-6-2: A Closer Look at Total, Average and Marginal Product Curves
- Product Curves Overheads: Figures 6-2 , 6-3 and Table 6-2

Procedure:

1. Evenly divide students and have one half sit on one side of the room and the other
half sit on the other side.
2. Place two desks together in front of each column of students.
3. Explain to the students that they are going to examine two firms’ production
functions.
The production function is a schedule that describes the relationship between
changes in output and different amounts of a single input, while all other inputs
are held constant.

# of Workers Marginal Product Total Product

(Inputs) (MP) (TP)
1
2
3
4
5
6
7
8
9
10
4. Tell the students that they are to sit in their designated seats and remain seated until
told to go to the production floor.
- Student waiting to be hired may cheer for their fellow workers but may not get
up until told to do so. Violation of this will result in forfeiting one unit of
production.
- The firm that makes the most product will receive _______________.

5. Demonstrate with an example what the firms are to make.

- Firms are producing CSW books.
- Each book must have five 8 x 5.5 pages
- 3 staples on left for binding
- CSW on cover
- Every book must pass quality control in order to be counted as a unit.
- Every student must have an active part in the production process of each book
in order for it to be accepted.

6. Start the lesson by review the following concepts:

What is an output? – any good or service produced by a firm

What is an Input? - Factors of production use to create an output.
-land
-labor
-Capital
-Financial
-Good used to produce another good/service
What is a fixed cost? Cost of an input that does not change when the level of output
changes.
What is a Variable Cost? Cost of an input that changes as level of output changes.

7. A. Review and write on the board the inputs used in the simulation.

1. (You/ labor)- We can hire and fire you at whim and you make 25 cents for every
book you make
2. (Staples/paper) – I pay for what I use
3. (staplers/ scissors) – I borrowed $20 to buy these and will pay back the loan at the
end of the week.
4. Desks(factories) – I borrowed $400 to buy these desks and will pay back at the
end of the month.

B. Have the students identify which inputs represent fixed coasts and variable costs.
Fixed: desks, stapler, scissors and markers.
 Variable: staples, labor and paper

C. Ask the students:

What time period is considered to be your firm’s long-run? Why?

Today’s production function will represent the short-run, Why?

Make sure the students understand the difference between short-run and long-run.

Short-run: Period of time over which some of the firm’s commitments are fixed;
most are variable and can be changed with production needs

Long-run: A period of time long enough for all of a firms commitment to come to
an end and all costs are variable and my be adjusted for production
needs.

8. Call the first two students to take their places at the production floor and review rules.
Give 1-2 minutes per round to produce as many books as possible
Call the 2nd set of student for the second round and review rules again.
Complete steps until all students have produced and diminishing returns have set in.

9. End the simulation by announcing the winning firm and have students complete
handout one,

10. Distribute Activity 2-6-1 and 2-6-2

Ask student to explain the relationships that they see between the number of inputs,
marginal product and total product. Tie discussion into what physically happened during
the simulation.

- Try to get the student to write their own version of the principle of
diminishing marginal returns:
All other things remaining constant, if only one input is increased a point
will be reached where each additional input produces less output that the
previous input.

Law of Diminishing Returns: After a certain point, when additional units

of a variable input are added to fixed input, the marginal product of the
variable input declines.
 Diminishing returns always apply in the short run, and in the short run
every firm will face diminishing returns. This means that every firm finds
it progressively more difficult to increase its output as it approaches
capacity production.

11. When going over activities 2-6-1 and 2-6-2, make sure the student understand:
Use Chapter 6 Power point presentations or overhead transparencies to further
explain these concepts.

a. How to calculate TP,AP, and marginal product

b. Review Law of Diminishing Returns
c. Review 3 stages of production:
1 1. Increasing returns: Total Product increases at increasing rate
2 2. Diminishing returns: Total product increases at a decreasing rate
( TP increases but at a slower rate because MP is decreasing but MP > 0.)

3. Negative Returns: Total product decreases.

(TP is decreasing because MP is < 0)
d. MP curve:
-Describes the rate at which the TP curve changes/ determines the slope of the
TP curve. (How much of an increase in total output results from each
additional input)
e. Average Product curve:
1. As long as marginal product is greater that average product, average
product is increasing.
2. As long as marginal product is less than average product, average product
is decreasing.
3. Marginal product = average product at its maximum point

Independent Practice:
Assign handout two

Closure: Discuss handout two and textbook work

Make sure students can apply the principle to their own lives by asking for real
life examples.
Assessment: