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Chapter9

# Chapter9 - MANAGERIAL ECONOMICS An Analysis of Business...

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1 MANAGERIAL ECONOMICS An Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall

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2 Chapter 9: Production and Costs Objectives: To examine the relationship between inputs and outputs To identify the most important determinants of cost per unit economies of capacity utilization economies of scale economies of scope learning effects To identify the difficulties involved in the empirical estimation of these effects To explain the unusual features of costs in the information sector
3 The Relationship Between Inputs and Outputs The fundamental relationship is that between inputs and outputs - expressed as the production function This can be examined at a number of levels the economy as a whole the industry the firm A number of different mathematical forms can be used to model the relationship Cobb-Douglas: Q = aK a L b translog production function

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4 The Cobb-Douglas Example Q = aK a L b : Where K= capital; L = Labour As each individual input (K,L) is increased, output increases, but at a decreasing rate - the principle of diminishing returns - one of the most fundamental economic ideas A production function identifies many different techniques within the same technology
5 The Cobb-Douglas Example Q = aK a L b : Where K= capital; L = Labour If (a+b) > 1; economies of scale If (a+b) < 1; diseconomies of scale If (a+b) = 1; constant returns to scale

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6 How to Find the Cost Minimizing Way to Produce Each Level of Output? As a mathematical problem, for level of output Q*
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Chapter9 - MANAGERIAL ECONOMICS An Analysis of Business...

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