As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in a Managerial Economics and Finance class. Posted here for their use or for helping other students.
PART 1 – Key Words
- Quantity (量) ~ How many products = Q (# of 🚗)
- Labor (员工) ~ The Number of Workers = L (👱)
- Capital (资金) ~ The Money ($$) we need = K (💲)
- Change (变化) ~ How much did the # change? = Δ(🔺)
- Marginal (边际成本) ~ Result if you add ONE MORE (+1) Q
- Rate (比率) ~ Ratio
- Substitution (取代) ~ XK = 1L (Substitution asks “what is X?”)
- Input (输入) ~ All the resources you put into a product.
- Ice Cream 🍦has many inputs:
- Milk🥛
- Eggs🍳
- Sugar
- Ice
- Salt
- Chocolate Sauce
- Ice Cream 🍦has many inputs:
- Output (产量) ~ The product you create
- Ice Cream 🍨🍦is the output!
Part 2 – The Relationship Between L, K, and Q
Every product (产量) can have lots of inputs (输入), just like the Ice Cream 🍦 or a Car 🚗.
Input + Input + Input + Input = Output (🚗)
But in our class, we focus on TWO inputs: Labor (👱) and Money (💲)
👱+💲=🚗
Labor (👱) + Money (💲) = Quantity (🚗)
L (👱)+ K (💲)= Q(🚗)
Example:
Justin sells 200 cars 🚗every day. Not 201 cars. Not 199 cars. He sells EXACTLY 200 cars 🚗every day.
L (👱) + K (💲) = 200 cars (🚗)
Justin knows that in ONE DAY🔆:
- 1 worker 👱 can create 50% of a car 🚗~ 2 workers 👱👱can create 100% of a car 🚗(one car)
- 1L = 0.5Q 🚗
- 2L = 1Q 🚗
- $5 💲 can pay for 20% of a car 🚗~ $25 💲can pay for 100% of a car 🚗(one car)
- 1K = 0.2Q 🚗
- 5K = 1Q 🚗
Rule #1 ~ If L ⬆ and K ⬆, then the # of 🚗 cars will also ⬆
Rule #2 ~ If L ⬇ and K ⬇, then the # of 🚗 cars will also ⬇
Rule #3 ~ If L ⬇ and the # of 🚗 cars is still 200 (stay the same), K must ⬆
Rule #4 ~ If K ⬇ and the # of 🚗 cars is still 200 (stay the same), L must ⬆
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Today, Justin looks 🤔at his Money 💲and is NOT happy😭. He thinks he spends TOO MUCH money😡! He wants to buy a new bicycle🚲, so he decides to SAVE $100 💲
This means today:
👱L + (💲K – 💲100K) = ? Q🚗
WHAT IS THE NEW Q (number of cars🚗) that Justin Makes Today?
Day 1 (Yesterday): 👱L + 💲K = 🚗200Q
Day 2 (Today): 👱L + (💲K – 💲100K) = 🚗200Q – all the 🚗cars $100K would pay for.
Remember! 💲1K = 🚗0.20Q (one dollar pays for 0.20 cars in a day)
If Justin does not spend $100 today, he will lose the money for 20 cars!
1K = 0.20 cars
💲-100K = -20 cars🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗🚗
ANSWER: Justin makes 180 cars today!
L + (K – 100K) = 200 cars – 20 cars
= 180 cars🚗
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OK?!?🤔
NO!!! 😡Remember –> “Justin sells 200 cars 🚗every day. Not 201 cars. Not 199 cars. He sells EXACTLY 200 cars every day. ”
PROBLEM: How can Justin still make and sell 200 cars tomorrow if he still saves the $100 (-100K) as today.
Rule #4 ~ If 💲K ⬇ and the # of 🚗 cars is 200 (the same), 👱L must ⬆
QUESTION: HOW MUCH should 👱L go up (⬆)?
- Step 1 ~ How many extra cars 🚗does Justin need to make? ~ Justin can make 180 cars right now if he saves $100 (-100K) but L stays the same as yesterday.
200 🚗 – 180 🚗= 20🚗
Justin needs to make 👱L ⬆ enough to make 20 extra cars🚗 tomorrow.
- Step 2 ~ How much L does Justin have to add (+) to make 20 more cars tomorrow?
?L + (K – 100K) = 200Q
Remember,
👱1L = 0.5Q 🚗 | 👱👱2L = 1Q 🚗
20Q 🚗= 40L
ANSWER: Justin will have to hire 40 workers (+40L) in order to make 20 more cars tomorrow.
👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫👫
FINAL SOLUTION
*Substitution = Adding L to Decrease K
(👱L + 👱40L) + (💲K – 💲100K) = 200 Q (🚗)
Part 3 ~ MRTS
MRTS = Marginal Rate of Technical Substitution
Go Back to Part 2.
- 🔺K💲
- Yesterday, Justin had K💲
- Tomorrow, Justin has -100K💲
- 🔺K = -100K💲
- 🔺L👱
- Yesterday, Justin had L👱
- Tomorrow, Justin has +40L👱
- 🔺L = +40L👱
MRTS = 5K : 2L |5💲 : 2👫
This just tells us:
- For every 2 👫workers Justin has, he spends $5💲💲💲💲💲.
- For every 1 👱worker Just has, he spends $2.50💲💲½
- If Justin wants to hire 1 worker (+1L) , he will save $2.50 (-2.50K)
- I Justin wants to save $40 (-40K), he must hire 16 workers (+16L)
MRTS shows how much L👱 can be a substitute for K💲!
Deceptively Blonde 