High Flying Factors of Production LESSON 3 HIGH FLYING FACTORS OF PRODUCTION

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1 High Flying Factors of Production LESSON 3 FACTORS OF PRODUCTION HIGH FLYING FACTORS OF PRODUCTION Overview This simulation of an airplane factory provides groups of students, as competing airplane manufacturers, the opportunity to make entrepreneurial decisions so they can become the best producers.the simulation helps students develop an understanding of the concepts of fixed and variable costs of production, capital investment and competitive markets. In this simulation, groups will make decisions about how to organize and how to use resources for the production of paper airplanes.the student groups will compete to be the best the most efficient airplane producers. Objectives The students will: Produce paper airplanes using the four factors of production. (Ohio Grade Six Citizenship Learning Outcome #12) Identify how the four factors of production are used in production. (Ohio Grade Six Citizenship Learning Outcome #12) Determine the variable, fixed and total costs of production. (Ohio Grade Six Citizenship Learning Outcome #13) (Ohio Grade Six Mathematics Learning Outcomes #6 and #21) Suggest ways to improve productivity in the production process. (Ohio Grade Six Citizenship Learning Outcome #14) Explain how an investment in capital can improve production. (Ohio Grade Six Citizenship Learning Outcome #12) Student Learning Statements Factors of production (land, labor, capital and entrepreneurial resources) are used to produce goods and services. Production decisions to use resources have benefits and costs. Investment in capital and labor resources can increase output and improve productivity. Greater output and improved productivity results when resources are used efficiently. 59

2 LESSON 3 High Flying Factors of Production Capital Capital Investment Entrepreneurship Factors of Production Fixed Cost Labor Land Produce Production Productivity Profit Revenue Variable Cost Vocabulary Capital: Goods produced and used to produce other goods and services (physical capital, not financial capital). Capital Investment: The purchase or creation of new capital resources to use for production. Entrepreneurship: The resource (factor of production) provided by people who organize other productive resources to produce goods and services. Factors of Production: Land resources (natural), labor resources (human), capital goods (physical capital) or entrepreneurial resources available to produce goods and services. Also called productive resources. Fixed Cost: A cost that does not vary with a change in the level of output. Labor: Human effort used to produce goods and services. Also called human resources, human capital or skills and knowledge. Land: Resources found in nature. Resources that are present without human intervention. Also called natural resources. Produce: To use land, labor, capital or entrepreneurship resources to make goods and services. Production: The act of using resources to make goods and services. Productivity: Output per worker or other resources used for production. Profit: The amount of money left over after all of the costs of production have been paid (revenues minus costs). Revenue: Income or payments for goods and services received by producers. Variable Cost: A cost that varies with a change in the level of output. Materials Markers (one per group, to begin with) Pencils (one per group, to begin with) Rulers (one per group, to begin with) Scissors (one per group, to begin with) Glue sticks/white glue (one per group, to begin with) 8 1 2" x 11" paper (a unit of 100 sheets per group, to begin with) Flat work surface for each group 60

3 High Flying Factors of Production LESSON 3 A timer Student Page: Airplane Factory Financial Report (transparency) Student Page: Airplane Factory Annual Report (transparency) Producing Ohio Video Connections Factors of Production (Southwest Local Schools) Markets & Prices (Ohio Farm Bureau, the Ohio corn industry) Internet Resources Prepare Assign students to work groups (four to five students). Duplicate Student Page: Airplane Factory Financial Report (one per work group). Prepare one set of materials for each work group (one each: marker, pencil, ruler, scissors and glue stick/white glue). Have extra materials available for student use later in the activity. Prepare units of 100 sheets of 8 1 2" x 11" paper.to begin the simulation, prepare one unit for each work group.the amount of paper actually required will vary, depending on the productivity of the groups, the time allowed for airplane production and the number of production rounds run. Make one paper airplane model from a 5 1 2" x 8 1 2" piece of paper (half of an 8 1 2" x 11" sheet).this airplane will become the prototype for the lesson. No particular type of airplane is required, however it should: Involve several folds Require at least one cut with scissors, in addition to the cut students will make to cut each sheet of paper in half (for example, the tail or wings can be trimmed to require an additional scissor cut) Require the use of glue to hold the airplane together at some point or fold TEACHER TIP: All airplanes produced by the students in this lesson must be exactly like the model produced by the teacher.the model sets the standard.this is key to the lesson s objectives. 61

4 LESSON 3 High Flying Factors of Production Introduce 1. Explain that each work group will become an airplane factory.the students in each factory will work together. Each group should work on a flat surface ideally large tables, otherwise around sets of desks grouped together. 2. Provide each factory with one set of materials (markers, etc.) and a unit of 100 sheets of 8 1 2" x 11" paper. Production: The act of using resources to make goods and services. Factors of Production: Land resources (natural), labor resources (human), capital goods (physical capital) or entrepreneurial resources available to produce goods and services. Also called productive resources. Produce: To use land, labor, capital or entrepreneurship resources to make goods and services. Profit: The amount of money left over after all of the costs of production have been paid (revenues minus costs). 3. Explain that the purpose of this lesson is to learn about production and how to make the best decisions about using the factors of production. 4. Present the model paper airplane to the class. Demonstrate how it flies. Ask the students if they know how to produce paper airplanes. Students may want to discuss the merits of different airplane designs. Demonstrate to the students how the model airplane is designed where and how it is folded, where the cut(s) need to be made with scissors and where glue is applied. Have students practice folding a plane to better understand how to produce this design. (Remove all of the practice airplanes prior to beginning the actual production process.) 5. Instruct each factory to select a name and design a logo to decorate its airplanes.the students may want to use their new logo to make a sign for their factory. Have students make their factories official by displaying their signs at their workstations. Teach 6. Explain that each factory will be a producer of airplanes. Further explain that you will be the consumer of airplanes and that you will only buy airplanes that are exactly the same design as your prototype. Explain that, as the only consumer, you will only buy the airplanes you want and you certainly will not buy airplanes that are not perfect. Remind the students that no one wants to fly on an airplane that is not constructed perfectly. Discuss 7. Explain that the factories will have enough time to manufacture enough airplanes to make a profit. What does it mean to make a profit? To make a profit means the factories must sell the airplanes for more than it cost to make the airplanes. 62

5 High Flying Factors of Production LESSON 3 Teach 8. Distribute copies of Student Page: Airplane Factory Financial Report to each factory and project the transparency of this sheet. 9. Review the costs of producing an airplane. Each 5 1 2" x 8 1 2" piece of paper costs $1. The labor that it takes to produce airplanes costs $1 per airplane. Each factory s capital equipment (tools) costs a total of $10. Note: The paper will represent the land factor of production (metals, chemicals, etc. used to produce airplanes). Paper is not a true land resource because it has been manufactured from land resources. It is more appropriately called an intermediate good. However for this activity, it is acceptable to use the paper to represent land resources. Land: Resources found in nature. Resources that are present without human intervention. Also called natural resources. Labor: Human effort used to produce goods and services. Also called human resources, human capital or skills and knowledge. Capital: Goods produced and used to produce other goods and services (physical capital, not financial capital). TEACHER TIP: The students airplanes will be produced from 5 1 2" x 8 1 2" pieces of paper 8 1 2" x 11" paper they have cut in half. Students should be cautioned to cut carefully, to maintain the quality of the airplanes they produce. And students should be cautioned to cut only as much paper as they will need because they will have to pay for any half-sheets of paper that go unused. The lesson being, use resources wisely. Waste costs money. 10. Point out the difference between the costs for land and labor and the cost of the capital resources. The land and labor costs are variable costs. Each airplane produced has an additional cost of $2 $1 for land and $1 for labor. The capital costs are fixed costs. No matter how many airplanes the factories make, the fixed cost for capital resources is $10. Variable Cost: A cost that varies with a change in the level of output. Fixed Cost: A cost that does not vary with a change in the level of output. 11. Explain that each factory must make the entrepreneurial decision to produce airplanes or not to produce airplanes. Later, each factory will be asked to make another entrepreneurial decision. Entrepreneurship: The resource (factor of production) provided by people who organize other productive resources to produce goods and services. 12. Explain that: As the consumer, you (the teacher) will pay $2.50 per completed, perfect airplane. If a factory produces 20 perfect airplanes, it will cost the factory $50 ($10 in fixed capital costs plus $40 in variable land and labor costs). The $2.50 a factory receives for each completed, perfect airplane is its revenues. The factories can sell 20 airplanes for $2.50 each, for a total revenue of $50. TEACHER TIP: An entrepreneur is a person who is an innovator the person who takes the financial risk of organizing resources for the production of goods or services in order to make a profit. 63

6 LESSON 3 High Flying Factors of Production Revenue: Income or payments for goods and services received by producers. 13. Review the mathematics of the costs and the revenues of producing airplanes using Student Page: Airplane Factory Financial Report. Explain: A factory can sell 20 airplanes for $2.50 each, for a total revenue of $50 assuming that it makes all of its airplanes perfectly. A poorly constructed airplane that you (the consumer) will not buy will still cost the factory $2 for land and labor resources. Discuss 14. How many airplanes must a factory make to begin making a profit? Twenty-one airplanes. If a factory makes 21 perfect airplanes, its cost is $52, and its income is $52.50 a 50 cent profit. After producing 20 airplanes, a factory s profit is 50 cents per airplane.this assumes that every airplane a factory makes is perfect. Explain that the key to making a profit is to use capital resources efficiently.the more airplanes a factory can make using its capital, the more profit it will make. If you make 30 perfect airplanes, how much profit will you make? Answer: $5 Costs Revenues 30 x $1 for land $30 Revenues $75 (30 airplanes x $2.50) 30 x $1 for labor $30 Minus total cost - $70 $10 for capital $10 Total cost $70 Profit $5 Note: If one of the 30 airplanes is not perfect, the factory will not receive $2.50 for that airplane, but the rejected airplane will still cost the factory $2 for land and labor.the factory s revenues will be reduced by $2.50, and profit will be down to only $2.50. This should be an incentive to make only perfect airplanes. Teach 15. Prepare the factories to begin their airplane production: Explain that students will have sufficient time to make enough airplanes to make a profit. Review the design of the model, or prototype, and the materials available (one marker, one pencil, one ruler, one pair of scissors, one glue stick and 100 sheets of paper). Students should have no other capital materials. Remind students to think ahead any 5 1 2" x 8 1 2" half-sheets of paper left over will cost their factory $1 each. Explain that each factory should use its marker to put its company logo on both sides of every airplane. 64

7 High Flying Factors of Production LESSON Begin Production Round One: Allow enough time for most factories to produce at least 20 airplanes.time this production session, and allow the same amount of time for the second, and if time allows, third production rounds. During production round one, factories should not interact with each other. Encourage each factory to work productively on its own. When it looks like most factories have about 20 airplanes, give a one-minute warning to the end of the production round. When the time is up, all materials and equipment should be put down. Again, note how long it took to complete the first production session.then allow the same length of time for all subsequent production sessions. TEACHER TIP: Move from factory to factory, giving encouragement. Remind students not to cut too many pieces and to complete each airplane as quickly as possible. Remind them of the cost of making a bad airplane. 17. After the first production round, each factory should arrange its completed airplanes on its table. Any extra materials should also be kept on the table. 18. Inspect all airplanes. Any imperfect airplanes should be crushed and left on the table. Be as lenient as necessary with quality, but make the point that quality control is vital. After your inspection, each factory should count the number of perfect airplanes completed. Using Student Page: Airplane Factory Financial Report, each factory should determine its costs, revenues and profit (or loss). Determine how many factories made a profit and how many did not. COSTS, REVENUES AND PROFIT Costs: Variable Costs + Fixed Costs = Total Cost $1 for the land (paper) for each airplane (variable cost) $1 for the labor for each airplane (variable cost) $10 for the capital equipment (fixed cost) Revenues: $2.50 revenue for each perfect airplane $2.50 times number of perfect airplanes sold = total revenues Profit (Loss): Total Revenues - Total Cost = Profit (Loss) 65

8 LESSON 3 High Flying Factors of Production Discuss 19. Ask the groups that made a profit how they did it.these factories should explain how they produced perfect airplanes. What happened to the other factories? Why didn t they make a profit? Were they wasteful? Were they organized? Did they make bad airplanes? 20. What would help factories to produce more perfect airplanes? Specifically, ask if factories had enough equipment.typically, the scissors are the resource that was the problem. Ask if each factory would like another pair of scissors if they would like to make a capital investment in scissors. Encourage students to think about whether the investment in another pair of scissors, or other capital resource, will increase their production. An investment in more capital will only be profitable if the new capital adds to productivity if it increases revenues more than the increase in costs (that is, the cost of adding the scissors). Capital Investment: To purchase or create new capital resources to use for production. Productivity: Output per worker or other resources used for production. 21. What might factories do to improve the efficiency of their labor resources? Discuss ways a factory might better organize itself for production. Suggest specializing with specific tasks, coordinating how other resources are used or controlling waste. Teach 22. Offer to sell each factory another pair of scissors or other capital that it thinks will increase its production.the cost of the additional capital (scissors, ruler, etc.) is $2 each.this will increase capital (fixed) costs to $12. Explain to the students that they will have to produce at least five more airplanes to make the investment profitable: 25 airplanes will cost $62 to produce ($25 land, $25 labor, plus $12 capital) 25 perfect airplanes will bring in $62.50 in revenues a 50 cent profit 23. Help students make an informed decision. Let them know that they will have exactly the same amount of time to produce airplanes in the second production round as they did in the first. Encourage the factories that wanted the additional capital to make the investment decision. However, all factories may not feel that the increase in production will be worth the cost. Remove all airplanes and the cut paper from the first session.the factories should begin the next production round with only whole 8 1 2" x 11" sheets of paper and their capital. 24. Begin Production Round Two: Allow as much time for airplane making as was allowed in the first production session.throughout the session, observe whether there are any changes in the ways the groups work together or use their resources. Give a warning when there is one minute left in the session. 66

9 High Flying Factors of Production LESSON Stop the second production session. Use Student Page: Airplane Factory Financial Report to determine costs, revenues and profits from the second production session. Count only the costs and revenues from the second production round do not include first production round numbers. Discuss 26. If there was greater production in the second round, ask the students why their production increased. 27. Discuss the differences between the first and second rounds: For those who made it, was the investment in more capital worth the cost? Were factories better organized in the second round? Did experience better skills and knowledge make factories better producers? Teach 28. Explain that as the consumer, you will purchase the airplanes that were made at the lowest cost. Each factory can determine its cost per airplane by dividing the total cost (land + labor + capital) by the total number of airplanes produced. Be sure to include any costs for waste (i.e., unused half-sheets of paper and unsold airplanes) in the total cost determination for each round. 29. If time allows and students are challenged to improve their production, organize for a third production round. At this point, the students may be very competitive. As the consumer, you will purchase the airplanes that were made at the lowest cost. Again, ask the factories if they would like to make an investment in more capital (scissors, ruler, pencil, etc.) An additional investment will again increase the capital cost by $2. If a third production round is conducted, the discussion should be similar to the discussion after the second production round. Conclude 30. Focus the wrap-up discussion on whether there was an increase in production between the two (three) production sessions and the possible reasons for the increase.was it because of the new capital, more experience or better organization? The students in each factory should explain what they did to increase production or improve quality from one session to the next. 67

10 LESSON 3 High Flying Factors of Production 31. Ask the students to generalize about the roles of the factors of production land, labor, capital and entrepreneurial decision-making in their manufacturing experience. Possible generalizations: Better capital (more capital) increases production and productivity. Better organization improves production. Experience (training and practice) helps workers to be more productive. Assess 32. Using Student Page: Airplane Factory Annual Report, each student should complete a report on his or her factory s production and productivity. Connect: Expanding the Learnings MATHEMATICS The calculation of costs, revenues and profits will reinforce math skills. Students can do additional problems to determine how many airplanes must be produced to yield a specified profit. It may be desirable to emphasize the concepts of fixed and variable costs. READING Many children s books describe how goods and services are produced. Students can identify the costs of production for a product when they read about a product in stories. SCIENCE Students can construct various models of paper airplanes.this can relate to the study of machines and aerodynamics. Students can test designs to determine which designs work best. 68

11 High Flying Factors of Production LESSON 3 Airplane Factory Financial Report Factory Name Directions: These are your costs for the production of paper airplanes in Round One: Land (paper) Labor (your skills and knowledge) Capital (scissors, rulers, desk, pencil) $1 per airplane (variable cost) $1 per airplane (variable cost) $10 (fixed cost) Your profit (payment for entrepreneurship) will be revenues minus costs. In Round One, your cost to produce one airplane is: In Round One, your cost to produce 20 airplanes is: Land $1.00 Land $20.00 Labor $1.00 Labor $20.00 Capital + $10.00 Capital + $10.00 Total cost = $12.00 Total cost = $50.00 The market price for airplanes is $2.50 each. Determine your production costs, revenues and profit or loss for each production round. STUDENT PAGE Remember:The consumer will only purchase perfect airplanes. Be sure to account for any additional capital (fixed costs) purchased in Rounds Two and Three. Production Variable Fixed Total Revenues Profit Round Costs Costs Costs (# x $2.50) or Loss

12 LESSON 3 High Flying Factors of Production STUDENT PAGE Airplane Factory Annual Report Name I was a worker in the airplane factory. 1. The land resources we used for production were: 2. The labor resources we used for production were: 3. The capital resources we used for production were: 4. The entrepreneurial decisions we made were: 5. In Production Round One, we made a profit or loss (circle one) because: 6. In Production Round Two, we made an entrepreneurial decision to: 7. For a producer, investing in capital resources should result in: 70