# Topic 08 - The Production Process and Costs.pdf - The...

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The Production Process and CostsACT197 | Sat, 1PM 5PMManagerial Economics
Learning ObjectivesDiscuss the production function in short-run and long-run decisions.Discuss the three measures of productivity such as total product, average product and marginal product.Differentiate the components of short-run total costs fixed and variable costs.Define sunk cost and how to consider this cost in maximizing profits or minimizing losses.Differentiate the three scale economies.2
IntroductionCompanies as well as non-profit 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 FunctionTechnologysummarizes the feasible means of converting raw inputs, such as steel, labor, and machinery, into an output such as an automobile. The technology effectively summarizes engineering know-how.Managerial decisions, such as those concerning expenditures on research and development, can affect the available technology how a manager can exploit an existing technology to its greatest potential.Production function is a function that defines the maximum amount of output that can be produced with a given set of inputs.4
The Production FunctionLet us consider a production process that utilizes two inputs, capitaland labor, to produce output. Let K denote the quantity of capital, L the quantity of labor, and Q the level of output produced in the production process.Although we call the inputs capital and labor, the general ideas presented here are valid for any two inputs. However, most production processes involve machines of some sort (referred to by economists as capital) and people (labor), and this terminology will serve to solidify the basic ideas.The technology available for converting capital and labor into output is summarized in the production function: Q = F (K, L)5
Short-Run vs. Long-Run DecisionsThe main goal is to use the available production function efficiently; this means that you must determine how much of each input to use to produce output.In the short run, some factors of production are fixed, and this limits your choices in making input decisions.For example, it takes several years for automakers to develop and build new assembly lines for producing hybrids. The level of capital is generally fixed in the short run. However, in the short run automakers can adjust their use of inputs such as labor and steel; such inputs are called variable factors of production.