new managerial econs presentation slides.pptx

Managerial Economics

1. The Production Process and Costs

2. Companies as well as nonprofit organizations are in the business of producing goods or providing services, and their successful operation requires managers to optimally choose the quantity and types of inputs to use in the production process. The successful operation of a consulting business, for instance, requires getting the right quantity and mix of employees and optimally substituting among these and other inputs as wages and other input prices change

3. THE PRODUCTION FUNCTION The production function is an engineering relation that defines the maximum amount of output that can be produced with a given set of inputs. Mathematically, the production function is denoted as Q=F ( K , L ) that is, the maximum amount of output that can be produced with K units of capital and L units of labor

4. Short-Run versus Long-Run Decisions The short run is defined as the time frame in which there are fixed factors of production. To illustrate, suppose capital and labor are the only two inputs in production and that the level of capital is fixed in the short run. In this case the only short-run input decision to be made by a manager is how much labor to utilize. The short-run production function is essentially only a function of labor, since capital is fixed rather than variable The long run is defined as the horizon over which the manager can adjust all factors of production. If it takes a company three years to acquire additional capital machines, the long run for its management is three years, and the short run is less than three years.

5. Measures of Productivity An important component of managerial decision making is the determination of the productivity of inputs used in the production process. As we will see, these measures are useful for evaluating the effectiveness of a production process and for making input decisions that maximize profits. The three most important measures of productivity are total product, average product, and marginal product Total product (TP) is simply the maximum level of output that can be produced with a given amount of inputs. For example, a machine and Average Product In many instances, managerial decision makers are interested in the average productivity of an input. For example, a manager may wish to know, on average, how much each worker contributes to the total output of the firm. APL=Q/L

6. Measures of Productivity The marginal product (MP) of an input is the change in total output attributable to the last unit of an input. The marginal product of capital therefore is the change in total output divided by the change in capital: MPL= ∆Q/∆L MPK= ∆Q/∆K

7. TP Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns Increasing, Diminishing and Negative Marginal Returns A E J AP MP TP AP MP Labor a e 1 5 8

8. Increasing marginal returns range of input usage over which marginal Product increases. Decreasing (diminishing) marginal returns range of input usage over which marginal product declines. negative marginal returns range of input usage over which marginal product is negative As the usage of an input increases, marginal product initially increases (increasing marginal returns), then begins to decline (decreasing marginal returns), and eventually becomes negative (negative marginal returns).

9. The Role of the Manager in the Production Process The manager’s role in guiding the production process described earlier is twofold: (1) to ensure that the firm operates on the production function and (2) to ensure that the firm uses the correct level of inputs. To maximize profits, a manager should use inputs at levels at which the marginal benefit equals the marginal cost. More specifically, when the cost of each additional unit of labor is w, the manager should continue to employ labor up to the point where Value Marginal Product = wage in the range of diminishing marginal product.

10. For example, if each unit of output can be sold at a price of P, the value marginal product of labor is VMPL = P x MPL and the Value Marginal Product of Capital is VMPK = P x MPK

11. Calculus- Profit-maximizing Usage Inputs Let P denote the price of the output, Q , which is produced with the production function F(K, L). The profits of the firm are π = PQ- wL- rK But PQ = TR, and wL and rK are labour cost and capital costs respectively. Since Q = F (K,L), the objective of the manager is to choose K and L so as to maximize π = P F (K, L) – wL - rK

12. Production Function Algebraic form