Economics For Managers - Session 06

8/3/2019 Economics For Managers - Session 06

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P S G I N S T I T U T E O F M A N A G E M E N T

M B A 2 0 1 1 - 1 3 B AT C H

I T R I M E S T E R

S E S S I O N V I - F O R B AT C H C A N D D

ECONOMICS FOR

MANAGERS


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The turn of events at Nokia

Nokia, the largest seller of mobile phones by volume,

said it planned to cut more than the 1 billion euros($1.43 billion) it had previously planned to trim from itsoperating expenses by 2013.

It announced the new plan as it reported a loss of 368million euros in the second quarter.

Nokia said its sales fell 7 percent in the second

quarter, to 9.275 billion euros from 10 billion euros a

year earlier. Nokias shares rose 2.5 percent as investors

welcomed the handset makers intention to increase its

austerity measures. (From New York Times -21/07/11).

29th Aug 2011

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EFM Faculty P.Uday Shankar


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Production

Production is the Creation of Goods andServices from Inputs and Resources.

( Thomas & Maurice)

While it is easy to quantify the inputs used for production of

a pumpset it would be difficult to quantify inputs like theresources from teachers in an educational institution whichrender Services. Therefore, the examples in the study of

production revolve around agriculture, industry andgovernment production.

29th Aug 2011EFM Faculty P.Uday Shankar

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Production Function

A production function is the link betweenlevels of input usage and levels of output.

It is the relationship between physical rates

of output and physical rates of input usage. At a given state of technology , the

attainable quantity of output depends on

the quantities of the various inputsemployed in production.


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Production Function

Q= f(X1,X2,X3,.., Xn)

where maximum output Qis the function of the

level of usage of the various inputs X.

Generally discussions on production hoveraround the two key inputs Labour and Capital.The production function in that case would be:

Q= f(L,K)where L is Labour and K is Capital.


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Production Efficiency

Technical Efficiency: Technical efficiency isachieved when the maximum possible amount ofoutput is being produced with a givencombination of inputs.

Eg. A pumpset manufacturer realises that a particular machine

was under-utilised and was involving more labour. He decides touse the machine to full capacity and redeploy labour to thepackaging section where there was labour shortage.

Economic Efficiency: Economic Efficiency isachieved when the firm is producing a givenamount of output at the lowest possible cost.


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Fixed and Variable Inputs

A Fixed Input is one for which the level of usagecannot readily be changed. For eg. Buildings,major machinery, managerial personnel. (Thoughnone of these are fixedin the real sense).

A Variable Input is one for which the level ofusage may be changed quite readily in response

to desired changes in the output. For eg. Labourat the lowest level, raw materials


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Short Run Production Function

A Short Run is that period of time in which theusage of one or more variables is fixed. TheShort Run production Function will then be:

Q= f(L,) or Q= f(L)The bar on K denotes that K- Capital is considered

fixed and only labour is considered as a variable

input for the purpose of determining output.For instance casual labourers in a factory may beincreased in order to increase the output. Similarly, L

could be fixed when considering Capital as a variable.


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Long Run Production Function Long Run refers to that time in the future when

all inputs are variable inputs. In other words inthe long run output can be varied by changingthe levels of both labour and capital.

Q= f(L,)Many short run situations combine together to

give a firm what can be called as PlanningHorizon.


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29th Aug 2011EFM Faculty P.Uday Shankar 10

Production Table for Production Function Q= f(L,)

Rate ofCapitalInput(K)

8 283 400 490 565 632 693 748 800

7 265 374 458 529 592 648 700 748

6 245 346 424 490 548 600 648 693

5 224 316 387 447 500 548 592 632

4 200 283 346 400 447 490 529 565

3 173 245 300 346 387 424 458 490

2 141 200 245 283 316 346 374 400

1 100 141 173 200 224 245 265 283

1 2 3 4 5 6 7 8

Rate of Labour Input


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Substitutability From the table we can see that there are many ways of producing a

particular rate of output. For instance, 245 units of the produce can beproduced with any of the following input combinations:

This shows the Substitutability between the factors of production. For eg.

Combination a is capital-intensive; d is labour intensive; and b and care between both.

Managers use these combinations in response to changes in relative pricesof the inputs.


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Combination K L

a 6 1

b 3 2

c 2 3

d 1 6


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Returns to Scale

If input rates are doubled the output rates are also doubled.

Returns to Scale is the relationship between output change andproportionate changes in both inputs to scale.

This sort of situations occur mostly in an industry where we have only afew large firms. For eg. The automotive industry in Chennai.


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K L Output

1 4 200

2 8 400


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Returns to Factor

In contrast to Returns to Scale where both theinputs were manipulated, Returns to Factorhappens when output changes because one

input changes while the other remainsconstant.

For instance if the rate of capital input is keptconstant at 2 and if labour is increased from

L=1 to L=6, the successive increases in outputare 59, 45,38, 33 and 30.


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Thanks


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Documents

Economics For Managers - Session 06