Beruflich Dokumente
Kultur Dokumente
Program
: MBA
Semester
Subject Code Subject Name Unit Number Unit Title
:I
: MB0042 : Managerial Economics :5 : Production Analysis
Production Analysis
Objectives:
To explain concept of production, production function and its managerial uses.
To define meaning and different cost concepts and managerial uses of cost of
production.
Lecture Outline
Cost of Production
Summary Check Your Learning Activity
Introduction
A business firm is also called as a production unit. Production is one of the most important activities of a firm in the circle of
economic activity.
The main objective of production is to satisfy the demand for different kinds of goods and services of the community.
Inputs
land, labor, capital organization.
Transformation Process
Outputs
finished products
Exit of Firms
Production Function :
Expresses the technological relationship between physical quantity of inputs employed and physical quantity of outputs obtained by a firm during a specified period of time. Q = f (L, N, K.etc) where Q =output per unit of time and L N K etc =inputs Rate of output Q is a function of inputs employed by firm per unit of time.
Variable inputs : factors, quantity of which varies with variations in the levels of
output produced by a firm. Eg. raw materials, fuel, etc.
Short run : is a period of time in which only variable factors can be varied while fixed factors like plants, machineries, etc remain constant.
Long run : is a period of time where producer have adequate time to make any
sort of changes in the factor combinations.
Each IsoQuant curve represents only one particular level of output. IsoQuant Map :a number of Iso-Quants representing different amount of out put.
Factor X Capital Y
IQ3 IQ2 X
0 Factor Y Labor
Marginal Rate of Technical Substitution (MRTS) : the rate at which a factor of production can be substituted for another at the margin without affecting any change in the quantity of output.
E2
Point of equilibrium IQ
X
B N 50 Units Factor Y
equal.
Increasing Returns to Scale : When quantity of all factor inputs are increased in a given proportion and output increases more than proportionately.
Constant Returns to Scale : When output increases in same proportion. Diminishing Returns to Scale : When output increases less than
proportionately.
SC
Diseconomies of Scope : disadvantages which occur when cost of producing two products jointly are costlier than producing them individually.
Cost of Production
Cost of production refers to the total money expenses (Both explicit and implicit) incurred by the producer in the process of transforming inputs into outputs
Cost of Production
Cost of Production
Total fixed cost (TFC) : total money expenses incurred on fixed inputs in the short run. TFC = TC - TVC.
Total variable cost (TVC) : total money expenses incurred on the variable factor
Cost of Production
Average fixed cost (AFC) : is the fixed cost per unit of output. AFC = TFC/Q Average variable cost: (AVC) : is variable cost per unit of output. AVC can be computed by dividing the TVC by total units of output. AVC = TVC/Q.
Cost of Production
Long run average cost is the long run total cost divided by the level of output.
The long run costoutput relationship is explained by drawing a long run cost curve through short run curves.
Cost of Production
Y
LAC SAC 1 SAC 2 SAC 3 SAC 4 SAC 5
Output
X Q
Cost of Production
and, therefore, we can derive the LMC directly from the LAC.
Y
LMC SMC 3 E LAC
C o st of P ro d u ct io n
SMC 1 SAC 1 A
SAC 3
SMC 2 SAC 2
Output
Summary
Production in economics implies transformation of inputs into outputs for our final consumption.
Production function explains the quantitative relationship between the amounts of inputs used to get a particular physical quantity of outputs.
Cost function explains the relationship between the amounts of costs to be incurred to produce a particular quantity of output.
1. Production function explain ___ relationship between inputs and outputs. Ans. Technological 2. In the short period only ___________ factor inputs are changed. Ans. Variable 3. Internal economies depend on the growth of a ___ and external economies depend on the growth of the ____. Ans. Firms, industry 4. In the long run all cost are ______________. Ans. Variable
Activity
Go to a local manufacturer producing goods for local consumption like tin boxes, baskets etc and find out how the manufacturer ascertains the market
price
for
his
product
after
taking
into
consideration
the
costs
of
manufacturing.