Fin chap 7&8 - Custom Scholars
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Fin chap 7&8

question
What do managers decide?
Managers decide what to produce for the market, how to produce it, the lowest cost to produce it, and the most efficient way to produce it.
question
What does a production function do?
It relates to the most output that can be produced from a given set of inputs
question
Marginal Product
Production functions allow measures of the marginal product of each input
question
The Production function
Is the maximum feasible quantity from any amounts of inputs
question
The COBB-DOUGLAS Production Function
If L is labor and K is capital, one popular functional form is known as the cobb-douglas production function
question
The Short Run
One or more inputs is fixed
question
The Long Run
All inputs are variable
question
What happens in the short run?
Only a subset of total possible input combinations is available to a firm
question
What happens in the long run?
all possible combinations are available
question
Average product = Q/L
Output per labor
question
Marginal Product = DQ/DL
Output attributed to last unit of labor applied
question
When does the peak of MP occur
Before the peak average product
question
The law of diminishing marginal returns
Increases in one factor of production, holding one or other factors fixed, after some point, results in the decline of marginal product
question
How many stages of production are there?
THREE
question
Stage 1 of Production?
The average product is increasing
question
Stage 2 of Production?
the average product is declining (but the marginal product is positive) - Decreasing returns (L2 to L3)
question
Stage 3 of Production?
Marginal product is negative, or total product is declining - Negative returns (area to the right of L3)
question
Determining the Optimal use of the Variable input
MRPL= MP L x MRQ
MFCL = ^TC/^L
- Employ as long as marginal benefits exceeds marginal costs
- Employ as long as MARGINAL REVENUE PRODUCT > Marginal cost: MRPL>MFCL
- Optimum level = MRPL = MFCL
question
Production Functions with multiple variable inputs
- In the long run, all factors are variable
- Q = f(K,L)
- Production Isoquants -- curve representing all input combinations which produces the same output
question
SLOPE of an ISOQUANT
Is the ratio of the marginal products, called the MRTS, the MARGINAL RATE OF TECHNICAL SUBSTITUTION
question
what is the objective of Optimal combination of inputs
to minimize the total cost for a given output
question
What are Isocost lines
the combination of inputs for a given cost, C
question
When rearranging optimal combination of inputs
this becomes the equimarginal criterion
question
Returns to scale
It is the proportionate increase in output that results from a given proportionate increase in all inputs
question
Reasons for increasing and decreasing returns to scale
- the advantage of SPECIALIZATION in capital and labor -- become more adept at a task
- PROBLEMS WITH COORDINATION AND CONTROL as an organization gets larger, harder to get everyone to work together
question
The importance of cost analysis
- Managers try to make the most efficient use of resources to maximize value, at the lowest cost possible

- The advantages once assigned to being a large firm (ECONOMICS OF SCALE and SCOPE) have not provided the advantages of flexibility and agility found in some smaller companies

- COST ANALYSIS is helpful in the task of finding the lowest cost methods to produce goods and services
question
Meaning and measurement cost
- there are many cost concepts used in business
- measurement of cost is a function of the purpose for which the cost info is used
question
Accounting VS Economic Cost
economic costs include the opportunity costs (value of next best alternative use) of owner-supplied resources, such as time and money, which are implicit costs
question
Accounting costs
involve explicit historical costs
question
economic costs
are based on making decisions these costs can be both IMPLICIT and explicit (labor, rent, supplies, etc)
question
Economic profit
total revenues - explicit costs - implicit costs
question
How many contrasts between accounting and economic costs?
THREE
question
Depreciation cost measurement
accounting depreciation cost (straight line depreciation) tends to be different from economic depreciation cost
- Economic depreciation cost considers opportunity cost; accounting depreciation cost considers historical cost
question
Inventory Valuation
Accounting valuation depends on its acquisition cost
- Economists view the cost of inventory as the cost of replacement
question
Skunk cost of underutilized facilities
Empty space may appear to have "no cost"
- Economists view its alternative use (rental value) as its opportunity cost
- Skunk costs already paid for, or there arae already exists a contractual obligation to pay
question
Long-run cost functions
all inputs are variable in the long run
- LRAC is long-run average cost
- envelope of SRAC curves
question
Product-level internal economics of scale
involves declining cost associated with a product as a firm increases production of throughout per day due to volume discounts, specialization, mass customization, and learning curve effects
question
Mass customization
is designed to standardize at least some of the production processes associated with fulfilling customer orders

- lee's customers can choose their own back-pocket stitching and the number of prior stone washings at mall kiosk. lee assembles the custom order from stockpiles of subassemblies

- economics offered in the mass production of items helps to offset the expense of individually designed products
question
Curve relationship
- workers and management become more efficient with experience
- the cost of production declines as cumulative volume of output increases
question
Percentage of learning
the proportion by which costs are reduced through doubling output is estimated
question
Economies & Diseconomies of scale: Plant-level internal economics of scale
involves producing several products at the same plant. this includes economy overhead, required reserves, investment interactions among products (economies of scope)
question
Economies & Diseconomies of scale: Firm-level Internal economies of scale
occur in firms with several plants. these include economies in distribution and transportation of a geographically disperse firm, or economies in marketing, sales
question
diseconomies of scale
- rising long-run average costs with an increase in output
- sources include transportation costs, inflexible operations designed for long run production runs, and problems of coordination and control by management
question
U-shaped LRAC
- Displays constant returns to scale
- the minimum efficient scale is the smallest scale at which minimum long-run average total costs are attained
- the maximum efficient scale is the largest scale before which unit costs begin to rise
- the line on the graph begins at the left hand top goes down to the bottom middle and goes up again on the right hand side creating a U-shape
question
Solving for the TOTAL PRODUCT
The Variable input x The Average Product
question
Solving for the AVG Product
The total product / the variable input
question
Solving for the MARGINAL PRODUCT
The current total product - the previous total product
question
The Variable input
1,2,3,4,5 etc
question
Mass customization
...
1 of 49
question
What do managers decide?
Managers decide what to produce for the market, how to produce it, the lowest cost to produce it, and the most efficient way to produce it.
question
What does a production function do?
It relates to the most output that can be produced from a given set of inputs
question
Marginal Product
Production functions allow measures of the marginal product of each input
question
The Production function
Is the maximum feasible quantity from any amounts of inputs
question
The COBB-DOUGLAS Production Function
If L is labor and K is capital, one popular functional form is known as the cobb-douglas production function
question
The Short Run
One or more inputs is fixed
question
The Long Run
All inputs are variable
question
What happens in the short run?
Only a subset of total possible input combinations is available to a firm
question
What happens in the long run?
all possible combinations are available
question
Average product = Q/L
Output per labor
question
Marginal Product = DQ/DL
Output attributed to last unit of labor applied
question
When does the peak of MP occur
Before the peak average product
question
The law of diminishing marginal returns
Increases in one factor of production, holding one or other factors fixed, after some point, results in the decline of marginal product
question
How many stages of production are there?
THREE
question
Stage 1 of Production?
The average product is increasing
question
Stage 2 of Production?
the average product is declining (but the marginal product is positive) - Decreasing returns (L2 to L3)
question
Stage 3 of Production?
Marginal product is negative, or total product is declining - Negative returns (area to the right of L3)
question
Determining the Optimal use of the Variable input
MRPL= MP L x MRQ
MFCL = ^TC/^L
- Employ as long as marginal benefits exceeds marginal costs
- Employ as long as MARGINAL REVENUE PRODUCT > Marginal cost: MRPL>MFCL
- Optimum level = MRPL = MFCL
question
Production Functions with multiple variable inputs
- In the long run, all factors are variable
- Q = f(K,L)
- Production Isoquants -- curve representing all input combinations which produces the same output
question
SLOPE of an ISOQUANT
Is the ratio of the marginal products, called the MRTS, the MARGINAL RATE OF TECHNICAL SUBSTITUTION
question
what is the objective of Optimal combination of inputs
to minimize the total cost for a given output
question
What are Isocost lines
the combination of inputs for a given cost, C
question
When rearranging optimal combination of inputs
this becomes the equimarginal criterion
question
Returns to scale
It is the proportionate increase in output that results from a given proportionate increase in all inputs
question
Reasons for increasing and decreasing returns to scale
- the advantage of SPECIALIZATION in capital and labor -- become more adept at a task
- PROBLEMS WITH COORDINATION AND CONTROL as an organization gets larger, harder to get everyone to work together
question
The importance of cost analysis
- Managers try to make the most efficient use of resources to maximize value, at the lowest cost possible

- The advantages once assigned to being a large firm (ECONOMICS OF SCALE and SCOPE) have not provided the advantages of flexibility and agility found in some smaller companies

- COST ANALYSIS is helpful in the task of finding the lowest cost methods to produce goods and services
question
Meaning and measurement cost
- there are many cost concepts used in business
- measurement of cost is a function of the purpose for which the cost info is used
question
Accounting VS Economic Cost
economic costs include the opportunity costs (value of next best alternative use) of owner-supplied resources, such as time and money, which are implicit costs
question
Accounting costs
involve explicit historical costs
question
economic costs
are based on making decisions these costs can be both IMPLICIT and explicit (labor, rent, supplies, etc)
question
Economic profit
total revenues - explicit costs - implicit costs
question
How many contrasts between accounting and economic costs?
THREE
question
Depreciation cost measurement
accounting depreciation cost (straight line depreciation) tends to be different from economic depreciation cost
- Economic depreciation cost considers opportunity cost; accounting depreciation cost considers historical cost
question
Inventory Valuation
Accounting valuation depends on its acquisition cost
- Economists view the cost of inventory as the cost of replacement
question
Skunk cost of underutilized facilities
Empty space may appear to have "no cost"
- Economists view its alternative use (rental value) as its opportunity cost
- Skunk costs already paid for, or there arae already exists a contractual obligation to pay
question
Long-run cost functions
all inputs are variable in the long run
- LRAC is long-run average cost
- envelope of SRAC curves
question
Product-level internal economics of scale
involves declining cost associated with a product as a firm increases production of throughout per day due to volume discounts, specialization, mass customization, and learning curve effects
question
Mass customization
is designed to standardize at least some of the production processes associated with fulfilling customer orders

- lee's customers can choose their own back-pocket stitching and the number of prior stone washings at mall kiosk. lee assembles the custom order from stockpiles of subassemblies

- economics offered in the mass production of items helps to offset the expense of individually designed products
question
Curve relationship
- workers and management become more efficient with experience
- the cost of production declines as cumulative volume of output increases
question
Percentage of learning
the proportion by which costs are reduced through doubling output is estimated
question
Economies & Diseconomies of scale: Plant-level internal economics of scale
involves producing several products at the same plant. this includes economy overhead, required reserves, investment interactions among products (economies of scope)
question
Economies & Diseconomies of scale: Firm-level Internal economies of scale
occur in firms with several plants. these include economies in distribution and transportation of a geographically disperse firm, or economies in marketing, sales
question
diseconomies of scale
- rising long-run average costs with an increase in output
- sources include transportation costs, inflexible operations designed for long run production runs, and problems of coordination and control by management
question
U-shaped LRAC
- Displays constant returns to scale
- the minimum efficient scale is the smallest scale at which minimum long-run average total costs are attained
- the maximum efficient scale is the largest scale before which unit costs begin to rise
- the line on the graph begins at the left hand top goes down to the bottom middle and goes up again on the right hand side creating a U-shape
question
Solving for the TOTAL PRODUCT
The Variable input x The Average Product
question
Solving for the AVG Product
The total product / the variable input
question
Solving for the MARGINAL PRODUCT
The current total product - the previous total product
question
The Variable input
1,2,3,4,5 etc
question
Mass customization
...

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