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7 & 8 - Production and cost - Benson (1)

7 & 8 - Production and cost - Benson (1) -...

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  1  Adapted from Baye  ©  2002 Production and Cost MANEC 387 MANEC 387 Economics of Strategy Economics of Strategy David Benson
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  2  Adapted from Baye  ©  2002 The Structure of Industries Competitive Rivalry Threat of new Entrants Bargaining Power of Customers Threat of Substitutes Bargaining Power of Suppliers From M. Porter, 1979, “How Competitive Forces Shape Strategy”
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  3  Adapted from Baye  ©  2002 Production and Supply Firms acquire inputs from suppliers Economics of production determines demand  for inputs  Inputs are transformed into outputs through a  productivity relationship defined by the  “production function” For example, consider the Cobb-Douglas  production function: Q = f(L,K) = AL α K β
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  4  Adapted from Baye  ©  2002 Total Product The Cobb-Douglas Production Function Q = f(K,L) = K 0.5 L 0.5 Assume that in the very short run, capital (K)  is fixed at 16 units Short run production function: Q = 16 Q = 16 0.5  0.5  L L 0.5 0.5  = 4 L  = 4 L 0.5 0.5 What is total product (output) when we  use 100 employees? Q = 4 (100 Q = 4 (100 0.5 0.5 ) = 4 (10) = 40 units ) = 4 (10) = 40 units
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  5  Adapted from Baye  ©  2002 Product of Labor Marginal product of labor  – MP L  =  Q/ L Measures the output produced by the last worker Slope of the production function Average product of labor  – AP L  = Q/L Measures the output of an “average” worker
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