But the business of pin making is divided up into a number of peculiar trades and each worker specializes in that trade. He pointed out that an individual not educated to the business could scarce make one pin a day and certainly not more than twenty. In The Wealth of Nations, Adam Smith wrote about the advantages of the division of labor using the example of a pin maker. If a business is going to produce, they would not want to produce when marginal product is increasing, since by adding an additional worker the cost per unit of output would be declining. When the marginal product is increasing, the total product increases at an increasing rate. What factors would cause this? As more workers are added, they are able to divide the respective tasks and specialize. When these workers are added, the marginal product increases. With a second worker, production increases by 5 and with the third worker it increases by 6. Marginal product is the additional output that is generated by an additional worker. Total product is simply the output that is produced by all of the employed workers. Doing all of these tasks by himself, our first worker is able to produce three widgets. With one worker, the worker must fold the paper, staple it, and write the W. What will be the output level of widgets as more labor is added? With zero workers, nothing gets produced. Each round is a certain amount of time, say 40 seconds. The inputs are a stack of quarter sheets of paper, one stapler, one pen, and a 2’ x 3’ sheet of poster board which represents your factory wherein all production must take place. If you have a big family, you can do this as a Family Home Evening activity otherwise you can just read along to see the results. Our widget will be made taking a quarter sheet of paper, folding it in half twice then stapling it and writing the letter W on it. For demonstration purposes in economics, we often make widgets, which is really any hypothetical manufactured device. We can demonstrate the impact of adding more of a variable resource, say labor, to a fixed amount of capital and see what happens to output.
What happens to output as more resources are employed? In order to produce, we must employ resources, i.e., land, labor, capital, and entrepreneurship. This section focuses on the second part of the equation, costs. Total revenue is equal to price times quantity and we examined their relationship in the elasticity section. Profits equal total revenue minus total costs.
We are now going to focus on the what is behind the supply curve.
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