EP1

Agriculture Management, Economics, & Sales Diminishing Returns

Unit: Economic Principles (EP)

Lesson Title: Diminishing Returns

Standards ABS.01.01.01.a. Recognize principles of capitalism as related to AFNR businesses. ABS.04.01.02.a. Identify financial concepts associated with production and profit. ABS.05.01.01.c. Interpret financial information for an AFNR business to determine profitability, net worth position, financial ratios, performance measures and ability to meet cash-flow requirements. ABS.04.01.02.a. Identify financial concepts associated with production and profit.

 CCSS.Math.Content.HSS-CP.A.1 Describe events as subsets of a sample space (the set of outcomes) using characteristics (or categories) of the outcomes, or as unions, intersections, or complements of other events (“or,” “and,” “not”).

Student Learning Objectives

Slide 2 in EP1 Diminishing Returns Lesson Objective After completing the lesson on diminishing returns, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Diminishing Returns Career Development Event Evaluation.

Enabling Objectives As a result of this lesson, the student will… 1. Define total product (TP), marginal product (MP), and average product (AP) and identify the relationship between them to illustrate the principle of diminishing physical returns. 2. Define total revenue (TR), total cost (TC), marginal revenue product (MRP), and marginal input cost (MIC), and use them to illustrate the principle of diminishing economic returns. 3. Define the point of maximum profit and maximum production and the relationship between the two.

Time: Approximately 200 minutes  Page 2 

List of Resources Bacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N. (1988). Agriculture Management and Economics Instructor Guide.Columbia, MO: Instructional Materials Laboratory.

Bacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N. (1988). Agriculture Management and Economics Student Reference Guide. Columbia, MO: Instructional Materials Laboratory.

Instructional Materials Laboratory. (1997). Agribusiness Sales, Marketing, and Management Instructor Guide. Columbia, MO: University of Missouri.

Schneiderheinze R., Wood C. (1997). Agribusiness Sales, Marketing, and Management Student Reference. Columbia, MO: Instructional Materials Laboratory. List of Tools, Equipment, and Supplies EP1 PowerPoint Presentation EP1 Activity Sheet and Evaluation Packet Note cards or small sheets of paper for review activity

Key Terms

Slide 3 in EP1 Diminishing Returns The following terms are presented in this lesson (shown in bold italics): Total product Marginal product Average product Diminishing physical returns Diminishing economic returns Total revenue Total cost Marginal revenue product Marginal input cost

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Interest Approach: Use an interest approach that will prepare the students for the lesson. Teachers often develop approaches for their unique class and student situations. A possible approach is included here.

Slides 4-10 in EP1 Diminishing Returns My Satisfaction – Each student will get EP1.1. The teacher will create a scenario for the class pertaining to a food item that would be enticing for all students (ex. donuts for a morning class, hotdogs/hamburgers for an afternoon class, miniature candy bars, cans of pop, fruit left over from fruit sales, cookies). Teachers may choose to get actual food items and have students partake in a live activity or could have them use their imaginations. Prior to teaching this lesson, teachers could also have students complete this activity at lunch or an FFA meeting where food is available. Teachers may want to give students a heads up that they will eat in class so they are able to effectively complete the activity.

For this example, we will use donuts. Step 1: Give each student a donut to eat. On their graph, ask students to place a dot in line with #1 at the bottom of the page and the level of satisfaction found on the left hand side of the page.

Step 2: Give each student a second donut to eat. On their graph, ask students to place a dot in line with #2 at the bottom of the page and the level of satisfaction found on the left hand side of the page.

Continue this process, giving students one more donut each time and have them chart their level of satisfaction. Explain to students that when they become overly full, they may find their satisfaction to decrease or zero-out when they are no longer interested in eating. Continue this process until at least the majority of students have graphed their satisfaction to be decreasing.

Step 3: Instruct students to connect their dots and answer the following questions on the bottom of the page. Use these questions to create class discussion:  How many donuts did you eat?  How much satisfaction did you receive from the first donut?  Was the second donut as good as the first?  How many donuts did you have to eat to get 100% satisfaction?  What happened after you ate one more donut past 100% satisfaction?

Conclusion to be reached from activity: We can only receive so much satisfaction from our inputs. Eventually, that satisfaction will begin to decrease or diminish. The same is true for agricultural products and business enterprises. We can continue to put more and more of something into a product or enterprise and see it gradually increase, but eventually it will reach a maximum and then begin to decline. We call this diminishing returns.

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Summary of Content and Teaching Strategies

Objective 1: Define total product (TP), marginal product (MP), and average product (AP) and identify the relationship between them to illustrate the principle of diminishing physical returns.

Teaching Strategies Related Content 1. To help us understand the process of diminishing returns, we must first understand three key terms: total product, marginal product, and average product. We will be using the chart at the bottom of the graph page.

2. Let’s fill in the information we know.

Slide 11 EP1 Diminishing Returns

3. Teach the definition of total product (TP), Total product is the total output or yield and is marginal product (MP), and average product represented using the letters TP. (AP).  In the interest approach, TP was represented  Have students complete the chart of the by the percent satisfaction received from each bottom of My Satisfaction EP.1 to help unit of input. them understand each definition. Marginal product is the change in output resulting Slides 12-14 in EP1 Diminishing Returns from each additional unit of input and is represented using the letters MP.  Percent satisfaction received from item #2 minus percent satisfaction received from item #1.  Continue this for all items eaten.

Average product is the amount of output produced divided by the number of units of input and is represented using the letters AP.  Percent satisfaction received divided by number of items eaten.

 Continue this for all items eaten.

4. Have students use their completed chart to

answer the following questions:

Slides 15-17 in EP1 Diminishing Returns

 As TP begins to increase, what is As TP is increasing at an increasing rate, MP and happening to MP and AP? AP are also increasing

.  As TP continues to increase, what As TP continues to increase, MP begins to decrease happens to MP and AP? and then AP begins decreasing.

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 When MP becomes negative, what Once MP becomes negative, TP begins decreasing. happens to TP?

5. Complete one more example with students Notice that the marginal product is decreasing using EP1.2. even though the total product is still rising. As more inputs are added, marginal product will Slides 18-19 in EP1 Diminishing Returns continue to decrease.

6. Reveal the principle of diminishing The principle of diminishing physical returns

physical returns. states that at some point in time the marginal product decreases with each additional unit of Slide 20 in EP1 Diminishing Returns input.  Michelle wants to expand her territory, but she also wants to increase her company’s profit. While the number of jobs completed may be increasing, the additional amount of work accomplished by each employee is decreasing because of the limitations of equipment and district size. As her territory nears its most profitable level of operation, the economic returns, or profit, will also decrease as additional levels of input are added.

Objective 2: Define total revenue (TR), total cost (TC), marginal revenue product (MRP), and marginal input cost (MIC), and use them to illustrate the principle of diminishing economic returns.

Teaching Strategies Related Content 1. Tie in the explanation of the principle of diminishing physical returns as noted above (right hand column) to introduce the idea of the principle of diminishing economic returns.

2. Reveal the principle of diminishing The principle of diminishing economic returns economic returns. states that beyond some point marginal economic  Just like there is a point in time when returns decrease with each additional unit of input. marginal product decreases with each additional unit of input, the same is true for marginal economic returns.

Slide 21 in EP1 Diminishing Returns

3. Before we dive into this concept, we must Total revenue is the total income from all the jobs first add a few more columns to our table: and is represented using the letters TR. TR, TC, MRP, MIC.  In our example, each job costs the  Direct students’ attention to the second customer $35.

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table on EP1.2 and assist them in completing the chart. Total cost is the cost of each employee and is represented using the letters TC. Slides 22-25 in EP1 Diminishing Returns  Each employee receives $80 per day. TC is the number of employees multiplied by $80.

Marginal revenue product is the increase in income created by adding an additional input by hiring another employee and is represented using the letters MRP.  MRP = change in revenue / change in input (MI)  TR for 2 employees ($245) minus TR for 1 employee ($140) is 105 MRP for row 2.  TR for 3 employees ($315) minus TR for 2 employees ($245) is 70 MRP for row 3.

Marginal input cost is the increase in total cost with each additional unit of input and is represented using the letters MIC.  MIC = change in cost ($) / change in input

 MIC is the $80 cost divided by the

marginal input (1).

Michelle should continue to hire employees as long

as MRP is greater than or equal to MIC

 MRP ≥ MIC

4. Looking at the completed chart, at what point should Michelle continue to hire employees?

Slides 26 in EP1 Diminishing Returns

5. Work through examples on EP1.3 as a class, with partners, or individually.

Slide 27-30 in EP1 Diminishing Returns

Objective 3: Define the point of maximum profit and maximum production and the relationship between the two.

Teaching Strategies Related Content 1. Refer students back to their completed charts (example about Soil A and Soil B will be most beneficial) and have them

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predict at what points maximum profit and maximum production would occur. Have a class discussion as students answer questions.  In directing students to the correct answer, refer them back to the definitions of each column.

2. Teach definition of maximum profit and Point of Maximum Production is when production maximum production. is at its highest possible level.

Slides 31 in EP1 Diminishing Returns Point of Maximum Profit is when net economics are at their greatest point. Point of Maximum Profit is when MIC = MRP Point of Maximum Profit always occurs at a point of production that is lower than maximum production.

3. Answer questions on EP1.4 to practice these points.

Slides 32-39 in EP1 Diminishing Returns

Review/Summary

Slide 40 in EP1 Diminishing Returns After a certain point, the economic returns for each successive unit of variable resource added to a unit of fixed resource tend to decline. However, one should continue adding inputs as longs as MRP > MIC. In order to receive maximum profit, expand production until MIC = MRC.

Review: Work through examples on EP1.5 with partners or individually.

Slide 41 in EP1 Diminishing Returns Exit cards: Students will answer the following questions on a note card or small slip of paper and hand to teacher as they exit:  What did you learn today about diminishing returns?  What questions do you still have about diminishing returns?

Application

Extended Activities

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Identify a popular FFA activity to examine for its value and effectiveness. Gather information from previous years on money spent for the activity, number of FFA members in attendance, number of guests in attendance (if applicable), etc. Chart the corresponding numbers as in the practice problems above and identify at what point spending more money does not result in more involvement from FFA members and/or guests. Activities that would work well for this project could include a community appreciation breakfast, monthly FFA meetings, a community blood drive, National FFA Week activities, etc. Have students identify an option or choice they have to make for their SAE (must have a monetary value). Examples could include hiring additional employees to a business, adding more fertilizer to a field, adding more fertilizer to a greenhouse crop, etc. Students will create a chart like used in the practice problems above to identify their point of maximum profit.

Evaluation Diminishing Returns CDE Evaluation EP1.6  Alternate - Diminishing Returns Evaluation EP1.7

Answers to Evaluation Evaluation EP1.6 See EP1.6 Key

Alternate Evaluation EP1.7 1. B 2. A 3. C 4. A 5. D 6. B 7. D 8. A

Economic Principles in Agriculture  EP1  Diminishing Returns