Slide MGT407 Slide06

(1)

Managerial Economics in a

Global Economy, 5th Edition

by

Dominick Salvatore

Chapter 6

(2)

The Organization of

Production

• Inputs

–

Labor, Capital, Land

• Fixed Inputs

• Variable Inputs

• Short Run

–

At least one input is fixed

(3)

Production Function

With Two Inputs

(4)

Production Function

With Two Inputs

(5)

Production Function

With Two Inputs

(6)

Production Function

With One Variable Input

Total Product

Marginal Product

Average Product

Production or

Output Elasticity

(7)

Production Function

With One Variable Input

L

Q

MP

_L

AP

_L

E

_L

(8)

Production Function

(9)

Production Function

(10)

Optimal Use of the

Variable Input

Marginal Revenue

Product of Labor

MRP

L

= (MP

L

)(MR)

Marginal Resource

Cost of Labor

MRC

L

=

TC

L

(11)

Optimal Use of the

Variable Input

(12)

(13)

Production With Two

Variable Inputs

Isoquants show combinations of two inputs

that can produce the same level of output.

(14)

Production With Two

Variable Inputs

(15)

Production With Two

Variable Inputs

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Production With Two

Variable Inputs

Marginal Rate of Technical Substitution

(17)

Production With Two

Variable Inputs

(18)

Production With Two

Variable Inputs

(19)

Optimal Combination of Inputs

Isocost lines represent all combinations of

two inputs that a firm can purchase with

the same total cost.

C

wL rK

C

w

K

L

C

Total Cost

( )

w Wage Rate of Labor L

( )

(20)

Optimal Combination of Inputs

Isocost Lines

AB

C = $100, w = r = $10

A’B’

C = $140, w = r = $10

A’’B’’

C = $80, w = r = $10

(21)

Optimal Combination of Inputs

(22)

Optimal Combination of Inputs

(23)

Returns to Scale

Production Function Q = f(L, K)

Q = f(hL, hK)

If = h, then f has constant returns to scale.

(24)

Returns to Scale

Constant

Returns to

Scale

Increasing

Returns to

Scale

Decreasing

Returns to

(25)

Empirical Production

Functions

Cobb-Douglas Production Function

Q = AK

a

_L

b

Estimated using Natural Logarithms

(26)

Innovations and Global

Competitiveness

• Product Innovation

• Process Innovation

• Product Cycle Model

• Just-In-Time Production System

• Competitive Benchmarking

• Computer-Aided Design (CAD)