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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
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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.
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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
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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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