Managerial Economics Chapter 5

Profit =

TR-TC

Major concerns if managerial decisions making are

revenue enhancement and cost control

A firms production function

a function showing the maximum output that can be produced with given inputs.

Short Run

a period of time in which the amount of one or more inputs cannot be changed

Long Run

a period of time long enough to allow the firm to vary ball it’s input

Fixed inputs

inputs that cannot be changed in short run

variable inputs 

inputs the manager can adjust to alter production

Total product

total output by using units of input

Managerial product

the additional output produced by an additional level of input holding other inputs fixed

Law of diminishing marginal returns

the use of an input increases with other inputs fixed, a point will be reached beyond which total product will increase at a decreasing rate

When the MP is positive 

Then the total output increases

When MP of labor is zero

then total output reaches maximum

Optimal use of one input

deciding how many workers to hire is often a primary function of a manager 

If MRPL >MCL

the firm should hire more people

If MRPL < MCL

the firm should hire less individuals

Production in the long run

total costsT= variable costs

Two key issues within long run production

deciding on the scale of the operations, as well as capital labor mix

Scale

the level of a firm’s inputs

Change in scale

a given percentage change in all inputs

Returns to scale

the percentage change in output resulting from a certain percentage change in input

Increasing returns to scale

a given percentage change in all inputs results to a greater percentage in output

constant returns to scale

a given percentage change in all inputs results in an equal percentage change in output.

decreasing returns to scale

a given percentage change in all inputs results in a smaller percentage change in output.

Output elasticity

a measure of the responsiveness of output to the change in all inputs

For increasing return to scale, the output elasticity

is greater than 1

For constant returns to scale, the output elasticity

is equal to 1

For decreasing returns to scale, the output elasticity

is less than 1

if alpha + beta > 1

increasing returns to scale

if alpha + beta = 1

constant returns to scale

If alpha + beta < 1

decreasing returns to scale '

Leontief Production Function

fixed proportions 

Optimal input combination rule

The ratio of marginal products to input costs must equal across all inputs. And total expenditure of using L and K must equal to total budget