Production Cost

And finance Allah Shmoop what Our production functions well Grandma's

air The source of all A lot of useful wisdom

They say stuff like happiness isn't found It's created and

good manners don't cost nothing And there hasn't been any

good music since the the Elvis died Okay well maybe

not Everything they say is golden But here's another good

one You get out of something what you put into

it Yeah well that one actually works for economics to

it's the basic sentiment behind the production functions The production

function is a process that economists used to show how

much stuff you can make for every potential combination of

input It's essentially a mathematical equation based on data gathered

through the production process And it allows companies to graph

what production would look like given different inputs You know

they consider different questions Like what if we use more

workers Or what if we bought Mohr equipment You know

some big fancy factory with robots What if we replaced

the dehydrated milk in our baby formula with pot ash

All right well these are the kinds questions of production

function answers and well then businesses can allocate their resource

is in the most efficient way possible Well they find

the point on the graph where they get the most

out of what they're putting in and that's what they

shoot for McDonald's is slowly replacing human workers with robots

Well how do they know if it's a good investment

Well they asked the production function or at least look

at it a fry flipping robot Kaswell ten thousand dollars

at volume It costs another two thousand dollars a year

in maintenance and appreciation per year and that fry flipping

baht can cover one friar And there are five fryers

at the restaurant so it takes five bots to replace

one worker or about fifty grand to replace that one

worker Wealthy company does some trials and finds that a

fry flipping robots can do the job two times faster

than one person In actuality or reality that person cost

twenty dollars an hour after salary of fifteen bucks and

then taxes and all the everything's company has to pay

pension health care all that stuff So over the course

of a year a fulltime fried flipper cost McDonald's forty

thousand dollars well to replace the employees the company needs

five bots costing a total of fifty grand It'll cost

another ten thousand dollars total in the maintenance and appreciation

But the Frye body is twice as fast as the

worker meaning McDonald's Khun turnover twice a cz many fries

So you'd need to workers to match the output of

the fry bots Well the bots cost say sixty thousand

dollars in Year one And yes we're making up a

lot of numbers The workers costal eighty thousand those two

workers But the company is already in the black They've

made twenty thousand dollars in savings by replacing those low

skilled workers with robots Well the production function can have

many variables in practice The production function depends on the

product being produced Different products require different levels of inputs

and the relationships between the inputs are different That cab

all of relationships includes things like land and labor and

capital in raw materials and time However many of these

dropout is being irrelevant or they get combined and kind

of fade away Key idea here is that the simple

version of all of this has two variables to variable

inputs There's labor that's usually represented by a big fancy

capital L And then there's capital that's usually represented by

you Hey there And this combo gives you the quantity

of output like in the equation And this gets a

queue right Belle Plus Que is cute that's in its

simplest form and that's the production function And that's what

it looks like The amount of labour and the amount

of capital gives you the amount of output The production

function can help measure the marginal productivity of one factor

of production It can also help figure out the least

expensive and most efficient way to make a product like

Say you're going to make pies with Grandma You're going

to need to spend a little capital on ingredients and

you know pie tins Well that's the capital That's the

big K You've also got labor That's you And grandmama

That's the big Al there for labor Enough for losers

Sorry Grandma Alright now onto your production function right there

Well you could decide whether getting some more money for

ingredients will help you bake more pies Or if you

call your cousins to help with the baking and Ad

Tio El there Or you could do both Now we

just need to talk to Grandma about her musical taste 00:04:17.677 --> [endTime] Yeah