Managerial economics Business strategy Chapter 5 The Production Process and costs ■■ ■■■■ Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 5 The Production Process and Costs
Overview I. Production Analysis Total Product Marginal Product. Average Product ■ Isoquants Isocost Cost minimization ⅡI. Cost Anal ysis Total cost. variable cost Fixed costs Cubic cost function Cost relations II. Multi-Product Cost functions Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Production Analysis Total Product, Marginal Product, Average Product Isoquants Isocosts Cost Minimization II. Cost Analysis Total Cost, Variable Cost, Fixed Costs Cubic Cost Function Cost Relations III. Multi-Product Cost Functions
Production Analysis Production function Q=F(K, L) a The maximum amount of output that can be produced with K units of capital and L units of labor Short-Run vS Long-Run Decisions Fixed vs. Variable Inputs Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Production Analysis • Production Function Q = F(K,L) The maximum amount of output that can be produced with K units of capital and L units of labor. • Short-Run vs. Long-Run Decisions • Fixed vs. Variable Inputs
Total product Cobb-Douglas Production Function Example: Q=F(K, L)=KL5 K is fixed at 16 units a Short run production function Q=(16)5L5=4L Production when 100 units of labor are used? Q=4(100)5=4(10)=40 units Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Total Product • Cobb-Douglas Production Function • Example: Q = F(K,L) = K.5 L.5 K is fixed at 16 units. Short run production function: Q = (16).5 L.5 = 4 L.5 Production when 100 units of labor are used? Q = 4 (100).5 = 4(10) = 40 units
Marginal product of Labor MPL=△Q△L Measures the output produced by the last worker Slope of the production function Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Marginal Product of Labor • MPL = DQ/DL • Measures the output produced by the last worker. • Slope of the production function
Average product of labor APL= Q/L Measures the output of an average worker Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Average Product of Labor • APL = Q/L • Measures the output of an “average” worker
Stages of production Increasing Diminishing ative Marginal Marginal Marginal Returns Returns Returns Q=F(K,L) AP MP Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Q L Q=F(K,L) Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns MP AP Stages of Production
Isoquant The combinations of inputs(K, l)that yield the producer the same level of output The shape of an isoquant reflects the ease with which a producer can substitute among inputs while maintaining the same level of output Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Isoquant • The combinations of inputs (K, L) that yield the producer the same level of output. • The shape of an isoquant reflects the ease with which a producer can substitute among inputs while maintaining the same level of output. L
Linear Isoquants Capital and labor are perfect substitutes K Increasing Output QIQ2Q L Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Linear Isoquants • Capital and labor are perfect substitutes Q1 Q2 Q3 Increasing Output L K
Leontief Isoquants Capital and labor are K perfect complements Q ncreasing Capital and labor are Output used in fixed-proportions Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Leontief Isoquants • Capital and labor are perfect complements • Capital and labor are used in fixed-proportions Q3 Q2 Q1 K Increasing Output