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ManEconCh04

# ManEconCh04 - MANAGERIAL ECONOMICS THEORY APPLICATIONS AND...

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MANAGERIAL ECONOMICS: THEORY, APPLICATIONS, AND CASES W. Bruce Allen | Keith Weigelt | Neil Doherty | Edwin Mansfield CHAPTER  4 Production Theory

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OBJECTIVES Explain how managers should determine  the optimal method of production by  applying an understanding of production  processes Understand the linkages between  production processes and costs
PRODUCTION PROCESSES Production processes include all activities  associated with providing goods and  services, including Employment practices Acquisition of capital resources Product distribution Managing intellectual resources

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PRODUCTION PROCESSES Production processes define the  relationships between resources used and  goods and services produced per time  period. Managers exert control over production costs by  understanding and managing production  technology.
PRODUCTION FUNCTION  WITH ONE VARIABLE INPUT A production function shows the maximum  amount that can be produced per time  period with the best available technology  from any given combination of inputs. Table Graph Equation

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PRODUCTION FUNCTION  WITH ONE VARIABLE INPUT Production Function Example Q = f(X 1 , X 2 ) Q = Output rate X 1  = Input 1 usage rate X 2  = Input 2 usage rate Q = 30L + 20L 2  – L 3 Q = Hundreds of parts produced per year L = Number of machinists hired Fixed Capital = Five machine tools

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PRODUCTION FUNCTION  WITH ONE VARIABLE INPUT Unit Functions Average Product of Labor = AP L  = Q/L Common measuring device for estimating the units of  output, on average, per worker

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PRODUCTION FUNCTION  WITH ONE VARIABLE INPUT Unit Functions (Continued) Marginal Product of Labor = MP L  =  Q/ L Metric for estimating the efficiency of each input in  which the input’s MP is equal to the incremental  change in output created by a small increase in the  input Using calculus (assumes that labor can be varied  continuously): MP = dQ/dL
PRODUCTION FUNCTION  WITH ONE VARIABLE INPUT Unit Functions (Continued) Unit function examples from Q = 30L + 20L 2  – L 3 Table 4.2 and Figure 4.2 AP L  = 30 + 20L – L 2 Using calculus: MP L  = 30 + 40L – 3L 2 AP L

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