ME_22MBA26_Unit3 test vtu ppt for university

managerial economics for considering the students for managerial economics. it is a notes for mba students to prepare for vtu examinations

1. Cost analysis and Production analysis Unit 3 MITE - MBA

2. Concepts Cost means scarifies or forgoing that has occurred or has potential to occur in future, measured in monetary terms. It includes the wage that a firm pays to its workers and the rent it pays for office space. What if the firm already owns an office building and doesn't have to pay rent? C= f(Q, T, P) MITE - MBA

3. Types of costs Accounting costs Actual expenses + depreciation Real costs Social and psychological non monetary Opportunity costs Own building or Self employed Implicit cost & Explicit cost Non cash cost and pocket cost Social cost CSR and environmental safety measure costs Replacement cost Replacing an existing machinery MITE - MBA

4. Direct and Indirect costs Controllable and Uncontrollable costs Production and selling costs MITE - MBA Types of costs

5. Sudhir Sitapati – Executive Director – HUL – Food & Refreshments MITE - MBA

6. Fixed cost A cost that does not vary with the output Variable cost A cost that varies as output varies Total cost Total variable cost + Total fixed cost MITE - MBA Costs in Short run

7. Marginal and Average cost MITE - MBA Costs in Short run

8. Determinants of short run cost Variable and total costs increase with the out put in short run. Diminishing marginal returns and marginal cost Average fixed cost and output Average variable cost and output Concept of increased return, constant return and decreasing return. Average total cost and output MITE - MBA

9. Cost functions in short run MITE - MBA ------- ------- ------- ------

10. Board & Spread sheet work Total cost functions and Per unit cost functions MITE - MBA

11. Costs in Long run Long run is a period long enough to make all costs variable including fixed costs in short run. In the short run variations in the output are possible only within the range permitted by the existing fixed plant and equipment. But in long run no fixed cost since the firm has sufficient time to fully adapt its plant. And all costs become variable. The length of time of the long run depends on Industry. MITE - MBA

12. The long run cost would refer to the cost of producing different levels of output by changes in the size of plant or scale of production. Concept of increasing return Constant return and Decreasing return MITE - MBA Costs in Long run

13. Long run Average cost When the plant size and other fixed inputs of the firm increase in the long run, the short run cost curves shift to the right. Start with the premises that in the long run the firm operates with three different plant sizes and can switch over to a different plant size depending on cost considerations. MITE - MBA

14. LAC curve is tangential to the various SAC curves. It is often called as the “Envelope Curve” since no point on an SAC curve can ever be below the LAC curve. The LAC curve is U shaped. This implies that lower and lower average cost in the beginning until the optimum scale of the enterprise is reached, and successively higher average costs It is because cost economies are available with the increase in size. MITE - MBA Long run Average cost

15. The long run average cost curve can never cut a short run average cost curve. This implies that for any given output average cost can not be higher in the long run than in the short run. Because any possible adjustments are made in the long run. LAC curve will touch the optimum scale curve at the latter’s least cost point. LAC curve will touch SAC curves lying to the left of the optimum scale curve at the left of their least cost points. MITE - MBA Long run Average cost

16. Production Function Production is the process of transformation of inputs in to goods and services of utility to consumer and/ or producers. Production function refers to the relationship between inputs and the outputs produced by them. The relationship is purely physical or technological in character, it ignores the prices of inputs and outputs. It basically deals with establishing the maximum output which can be achieved with a given set of resources or inputs. MITE - MBA

17. Concepts Types of inputs Technology Fixed and variable inputs Factors of production Land Labour Capital Enterprise organization MITE - MBA

18. Production function with one variable input In the short run producers have to optimise with only one variable input. Assume Labour and Capital are two inputs, where capital is fixed and labour is the variable input. The amount of capital is kept constant and labour is increased to increase output. Such a production function is termed as variable proportion production function. Q= f(L, K), Q is output, is labour and K is capital. MITE - MBA

19. Law of variable Proportions It has also been called as the Law of Diminishing Marginal returns. It shows the input – output relationship or production function with one factor variable while other factors of production are kept constant. Farmer with 20 acres of land. Some fixed investments like tube well and machinery, labour is variable factor. MITE - MBA

20. Law of eventually diminishing returns Law does not states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns. Initially increasing return, then begin declining. MITE - MBA

21. Law of variable proportions MITE - MBA

22. Increasing returns to the variable factor This is the first stage, where additional units of labour are employed, the total output increases more than proportionally, so marginal product rises. MP > 0 and MP > AP MITE - MBA

23. Diminishing returns to the Variable factor Total output increases, but less than proportionate to increase in labour. Given the amounts of all other production factors, use of increasing amounts of a variable factor in a production process beyond some point will result in diminishing marginal returns in total output. Here both AP and MP are positive but declining. MP > 0, but AP is falling, and MP < AP. MITE - MBA

24. MP< 0 MITE - MBA Negative returns to the variable factor

25. MITE - MBA Production function with one variable input

26. Production function with two variable inputs In the long run all inputs are variable ... The firm has the opportunity to select that combination of inputs which maximizes returns. According to this theory, there are only two inputs and both those are variable.. MITE - MBA

27. Isoquants An Isoquants is also known as Iso – product curve, equal product curve or a production indifference curve. These curves show the various combinations of two variable inputs resulting in the same level of output. MITE - MBA

28. Downward slopping A higher Isoquant Represents a Higher output Isoquants do not Intersect Marginal rate of technical substitution MITE - MBA Characteristics of Isoquants

29. ISO-COSTS It is a line that shows all probable combination of inputs that results in the same total cost/outlay. Total cost = P1X+P2Y where P1, P2 are price and X, Y are factors. P1 X Y P2 Total Cost P1X+P2Y 10 50 20 1000 10 20 40 20 1000 10 80 10 20 1000 10 100 20 1000

30. The Isocost line is similar to that of budget line for the consumer. The Isocost line is the budget line for a producer in terms of two inputs. Suppose that a firm uses only labour and capital in production, then total cost C = wL + rK Where c is the total cost, w is the wage rate, L is the units of labour, r is the cost of capital and K is the total quantity of capital used. MITE - MBA Isocost Curves

31. Increasing, Constant and Decreasing Returns to Scale. Increasing : Situation in which output more than doubles when all inputs are doubled. Constant: Situation in which output doubles when all inputs are doubled. Decreasing: Situation in which output less than doubles when all inputs are doubled. MITE - MBA

32. Economies of scale Lowering cost of production by producing in bulk Benefits of mass production Advantages of mass Production Diseconomies of scale Disadvantages that arise due to the expansion of production scale resulting in rise in marginal cost of production. Beyond a point when advantages of division of labour, excess capacity, transport, warehousing etc is fully utilised, diseconomies of scale starts coming in resulting in increased marginal cost of production MITE - MBA

33. Internal economies Labour economies - Specialisation Technical economies - Greater efficiency of machines Managerial economies – Trade discounts, spreading the overheads Financial economies – risk bearing economies Production in stages – Return to scale MITE - MBA

34. External economies Technological advancement Easier access to cheaper raw materials Pool of skilled workers MITE - MBA

35. Pricing strategies Full cost pricing Product line pricing Price skimming (Electronic gadgets ) Penetration pricing Loss leader pricing (Wednesday ) Peak load pricing (Market situation based) MITE - MBA