Lecture 6 - Production and Cost Continued.pptx

Lecture 6 - Production and Cost Continued.pptx - LECTURE 6...

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LECTURE 6 (2/23/16) Managerial Economics – Dr. Rishe PMBA – Wash U (Spring 2016) 1
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OUTLINE Production (chapter 7) Various aspects of SR and LR production Optimal number of workers to hire (Will be on Exam 2!) Optimal mix of two inputs (Will be on Exam 2!) Returns to scale (Long Run) Costs (chapter 8) Various aspects of SR and LR costs Importance of MC, AVC, ATC Economies and Diseconomies of Scale (Long Run) Discuss the mirror-image relationship between production and costs. And do some problem solving associated with production and costs 2
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THE COMMON SENSE OF PRODUCTION AND COSTS THEO All firms produce either a good or service All firms utilize managers or entrepreneurial talent to manage the inputs used in the production process. In theory, we argue that there are several rules which govern the rational, profit- maximizing, cost-minimizing decision managers/entrepreneurs make. These rules are tied to the theories of production and costs. 3
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THE PRODUCTION PROCESS Sportsimpacts creates technical reports for sporting events Need labor to collect data And software to help process the analytics of the reports Wash U creates education and research Need professors and staff to produce each And software, equipment, and various technical resources to be among the industry leaders in their field. Enterprise rents cars Need customer service staff, rental staff, computer software, materials for car maintenance, etc… 4
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PRODUCTION FUNCTIONS AND TIME Q = f (inputs) * technology What firms produce is a function of: the inputs (or factors of production) at their disposal, and The technology at their disposal. Inputs could be labor, land, capital Short run v long run In the short run, at least one input is fixed In the long run, all inputs can vary. 5
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SR RELATIONSHIP BETWEEN INPUTS AND OUTPUT For many of our examples, we simply and say: Consider a P.F. where Q = f (Labor, Capital) And suppose Capital is fixed This enables us to focus on the relationship between Labor and output Which will help us evaluate how output changes as we add additional workers to a fixed amount of capital. We can assess: Total productivity Marginal productivity Average productivity 6
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GRAPHICAL REPRESENTATION 8
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DIMINISHING MARGINAL PRODUCTIVITY Simply denotes that: As you add more of a variable input to a fixed input, at some point the return to total productivity will diminish As you add more labor to a fixed amount of capital, total productivity could initially: Rise at an increasing rate (I.e. MP rises) Rise at a constant rate (i.e. MP constant) Rise at a diminished rate (i.e. MP falls) But, MP will eventually fall.
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  • Spring '14
  • Baccara
  • Economics, Economics of production

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