managerial economics

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managerial economics chapter six production and cost analysis by: teklebirhan a. (asst. prof) e-mail: tbalemnew@gmail.com 1 aau , 2024 2 define theory of production and theory of cost describe the concept of economies and diseconomies of scale solve economies of scope problems objectives 3 production is a process of converting an input into a more valuable output. the analysis of demand is mainly used for planning the production process and determining the level of production. for equilibrium, supply should be equal to demand. production is an aspect of the supply side of the market. for example: leather from animal’s skin (input) dying, cutting, shaping (process) leather shoe (output). 6.1. theory of production 4 production is an important economic activity which satisfies the wants and needs of the people. production theory examines the physical relationships between inputs and outputs. by physical relationships we mean relationships in terms of the variables in …

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these represent the relationships between inputs and outputs in symbolic or mathematical form. 6.1.2. production functions 8 in general terms we can say that any production function can be expressed as: 푸 = 풇(풙ퟏ; 풙ퟐ; 풙ퟑ; … … ;풙풏) where 푸 represents output of a product and 풙ퟏ; 풙ퟐ; 풙ퟑ; … … ;풙풏 represents the various inputs. this function is often expressed as: 푸 = 풇 (푳,푲) where l represents the labor input and k represents the capital input. cont….. 9 inputs are commonly classified as fixed inputs or variable inputs. fixed inputs are those inputs whose quantity cannot readily be changed when market conditions indicate that an immediate adjustment in output is required. in fact, no input is ever absolutely fixed but may be fixed during an immediate requirement. for example, if the demand for beer rises suddenly in a week, the brewery factories cannot plant additional machinery overnight …

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put. as a manager, he has to know the price of the input factors and the budget allocation of the organization. cont….. 13 to achieve the maximum output (objective of the firm) the firm has to utilize the input factors efficiently. in the long run, without increasing the fixed factors it is not possible to achieve the goal. therefore, it is necessary to understand the relationship between the input and output in any production process in the short and long run. cont….. 14 there is some measure of productivity. these are total product (tp), marginal product (mp) and average product (ap). the total product (tp) is the total amount of output resulting from the use of different quantities of inputs. if we assume labor (l) to be the variable input assuming (capital, etc., held constant) then marginal product of labor (mpl) is defined as the change in total product (tp) …

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le input (labour) that the firm should employ because this depends on several other factors than the productivity of labour. however, it is possible to determine the ranges over which the variable input (labour) be employed. to this end, economists have defined three stages of short run production. 6.1.6. stages of production 19 stage i: the stage goes from the origin where tp=0 to the point where 푀푃 is maximum. this stage is not an efficient region of production though the mp of variable input is positive. it is a range of increasing marginal product. the reason is that the variable input (the number of workers) is too small to efficiently run the fixed input so that the fixed input is under-utilized (not efficiently utilized).  it is also known as an extensive stage, b/c the variable inputs are under-employed & the fixed inputs are under-utilized cont….. 20 cont….. 21 …

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tive to the fixed input this stage implies that labor is over employed and capital is over utilized. where the rational producer will produce? cont….. 24 cont….. 25 to understand a production function with two variable inputs (long run production), it is necessarily known the concept iso- quant/iso-product curve. the iso-quant curve show the various combinations of two variable inputs resulting in the same level of output. in other words, an isoquant is a curve along which the maximum achievable rate of production is constant. various iso-quant curves presented in a graph is called as iso- quant map. cont….. 26 characteristics of isoquants a) isoquants are normally negatively sloped: because when one factor increases, the other factor decreases. b) an isoquant laying above and to the right of another represents a higher level of output. c) two isoquants cannot intersect each other or tangent to one another. d) no isoquants …

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managerial economics chapter six production and cost analysis by: teklebirhan a. (asst. prof) e-mail: tbalemnew@gmail.com 1 aau , 2024 2 define theory of production and theory of cost describe the concept of economies and diseconomies of scale solve economies of scope problems objectives 3 production is a process of converting an input into a more valuable output. the analysis of demand is mainly used for planning the production process and determining the level of production. for equilibrium, supply should be equal to demand. production is an aspect of the supply side of the market. for example: leather from animal’s skin (input) dying, cutting, shaping (process) leather shoe (output). 6.1. theory of production 4 production is an important economic activity which …

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