New A Level Economics. Theory of the Firm SAMPLE RESOURCE. Resources for Courses

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1 New A Level Economics Theory of the Firm Resources for Courses

2 Digging a Hole Resources for Courses Teacher Instructions This resource (including the Powerpoint game file) is used to introduce the concepts of different types of cost and revenues and how they may appear on a chart. Having calculated the costs and revenues as part of the activity, students then chart these on the worksheets. The resource can then be used to go on to discuss objective setting (e.g. profit maximisation) and how these would be represented on a diagram. Before you start: The student worksheets are pages 4 to 7 of this resource. Print off pages 4 and 5 and hand to students before the start of the activity. Pages 6 and 7 should be given to the students on completion of the activity. Separate the group into (up to) 5 teams. Running the activity Start the Powerpoint slideshow, ensuring that the macros have been enabled when prompted. Show the first 5 slides and explain the activity (refer to the student worksheets as well). On completion of these slides, read through page 4 to ensure that students understand marginal revenue and cost and average revenue and cost. The students appear to be participating in a game that requires them to work out the speediest way to dig holes by guessing at which way they should combine the human resource. Ultimately, the students are recording the costs and revenues over the 5 rounds of the game to see how they change and how they would look on a diagram. The students do not need to know the actual purpose until the end of the activity.

3 Digging a Hole Resources for Courses Note (for teacher): The optimum combination over the 5 rounds is to have 1 rock breaker, 1 barrow user and a further 3 diggers. This will produce the speediest combination. Having explained the purpose of the activity (who can be the quickest average time to produce a hole per round), give the students a couple of minutes to decide on their first decision: should they choose to have a further digger, a rock breaker or a barrow user? When they have decided, get each team to tell you their decision. Invite them to the computer (don t show this to the rest of the class) and input their decision by clicking on the team name and then the button of their decision (e.g. a digger). Ask them to record the changes to Total Time, Average Time, Total Cost and Total Revenue. Students should then be sent back to calculate the marginal revenue and cost and average revenue and cost. On completion, if they wanted to check the outcome they can return to the team screen and you can click on the button to reveal the overall table. Repeat this with all 5 teams. Repeat this over all 5 rounds ensuring the students complete their worksheets during each round. When the activity is over go through each team s outcome, pointing out which team has completed the activity in the shortest average time. Then allow students to use their data to complete the diagram using the blank diagram on page 6. Use page 7 to show the relevancy of their diagram.

4 digging a hole student worksheet The activity will last for 5 rounds. To begin with you have 2 diggers digging 2 holes. At the beginning of each round you must decide on which type of worker you wish to employ for that round. You have 3 choices: another digger, a rock breaker or a barrow user. Your aim to increase the number of holes you can dig by 1 and reduce your average time for digging each hole. Digger Rock breaker Barrow user Wages are not your only costs. You also have to pay for some tools. However, the tools can be shared so that average costs do not always remain the same. You already have 2 diggers. They currently cost you 560 in total costs. Now you must decide which worker to employ in each round of the game. Who do you think will make your hole digging the most effective? Have your worksheet ready to fill in once you have decided! On making your decision, tell your teacher who will inform you of your data. No. of workers/holes Total Time (hours) Average Time (hours) Total Costs Total Revenue ( ) Marginal Revenue ( ) Marginal Cost (( ) Average Revenue ( ) Average Cost ( )

5 Price Price is determined by demand and supply. As the firm increases output they will need to reduce their price in order to sell more of their products. This game assumes that all output is sold. The schedule is below: Output 2 holes 3 holes 4 holes 5 holes 6 holes 7 holes Price ( ) per hole Total Time - Number of hours to dig the holes. Average Time - The time taken to dig all holes divided by the number of workers. Total Cost - The sum of all costs of all Factors of Production (e.g. wages). Total Revenue Total number of holes x price per unit. Marginal Revenue The increase in revenue as output (number of holes) increases by one. Marginal Cost The increase in total cost as output (number of holes) increases by one. Average Revenue Total revenue divided by the number of holes. Average Cost The total cost divided by the number of holes dug. What was your lowest average time for digging a hole? What was the lowest average time for digging a hole in the whole class?

6 Draw in an average cost, average revenue, marginal cost and marginal revenue curve. Price, Costs and Revenues Output (no of holes)

7 Revenue/ Costs P a 0 b Note: The speed at which you workers completed digging holes has not made any difference to the revenue in this exercise as you only receive revenue for a completed hole. In reality, the quicker the job is completed the sooner the workers can move on to the next job so there would be an increase in revenue during a given time period. Notice that the average revenue line is the same as the price schedule. The line is downward sloping as the firm will need to reduce prices in order to sell more of their goods. In effect the AR curve is the demand curve for this firm. Profit maximisation occurs at the point at an output and price where marginal cost = marginal revenue. c The amount of revenue at this profit maximisation level is represented by the area 0PbQ on this diagram. The amount of cost at this profit maximisation level is represented by the area 0acQ on this diagram. The amount of profit at this profit maximisation level is represented by the area apbc on this diagram. Can you calculate the nominal output and price if you were able to operate at the profit maximisation point? MR MC Q ATC AR Output