Fin chap 7&8

question

What do managers decide?

answer

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?

answer

It relates to the most output that can be produced from a given set of inputs

question

Marginal Product

answer

Production functions allow measures of the marginal product of each input

question

The Production function

answer

Is the maximum feasible quantity from any amounts of inputs

question

The COBB-DOUGLAS Production Function

answer

If L is labor and K is capital, one popular functional form is known as the cobb-douglas production function

question

The Short Run

answer

One or more inputs is fixed

question

The Long Run

answer

All inputs are variable

question

What happens in the short run?

answer

Only a subset of total possible input combinations is available to a firm

question

What happens in the long run?

answer

all possible combinations are available

question

Average product = Q/L

answer

Output per labor

question

Marginal Product = DQ/DL

answer

Output attributed to last unit of labor applied

question

When does the peak of MP occur

answer

Before the peak average product

question

The law of diminishing marginal returns

answer

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?

answer

THREE

question

Stage 1 of Production?

answer

The average product is increasing

question

Stage 2 of Production?

answer

the average product is declining (but the marginal product is positive) - Decreasing returns (L2 to L3)

question

Stage 3 of Production?

answer

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

answer

- 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

answer

- 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

answer

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

answer

to minimize the total cost for a given output

question

What are Isocost lines

answer

the combination of inputs for a given cost, C

question

When rearranging optimal combination of inputs

answer

this becomes the equimarginal criterion

question

Returns to scale

answer

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

answer

- 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

answer

- 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

answer

- 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

answer

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

answer

involve explicit historical costs

question

economic costs

answer

are based on making decisions these costs can be both IMPLICIT and explicit (labor, rent, supplies, etc)

question

Economic profit

answer

total revenues - explicit costs - implicit costs

question

How many contrasts between accounting and economic costs?

answer

THREE

question

Depreciation cost measurement

answer

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

answer

Accounting valuation depends on its acquisition cost
- Economists view the cost of inventory as the cost of replacement

question

Skunk cost of underutilized facilities

answer

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

answer

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

answer

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

answer

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

answer

- workers and management become more efficient with experience
- the cost of production declines as cumulative volume of output increases

question

Percentage of learning

answer

the proportion by which costs are reduced through doubling output is estimated

question

Economies & Diseconomies of scale: Plant-level internal economics of scale

answer

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

answer

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

answer

- 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

answer

- 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

answer

The Variable input x The Average Product

question

Solving for the AVG Product

answer

The total product / the variable input

question

Solving for the MARGINAL PRODUCT

answer

The current total product - the previous total product

question

The Variable input

answer

1,2,3,4,5 etc

question

Mass customization

answer

...

1 of 49

question

What do managers decide?

answer

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?

answer

It relates to the most output that can be produced from a given set of inputs

question

Marginal Product

answer

Production functions allow measures of the marginal product of each input

question

The Production function

answer

Is the maximum feasible quantity from any amounts of inputs

question

The COBB-DOUGLAS Production Function

answer

If L is labor and K is capital, one popular functional form is known as the cobb-douglas production function

question

The Short Run

answer

One or more inputs is fixed

question

The Long Run

answer

All inputs are variable

question

What happens in the short run?

answer

Only a subset of total possible input combinations is available to a firm

question

What happens in the long run?

answer

all possible combinations are available

question

Average product = Q/L

answer

Output per labor

question

Marginal Product = DQ/DL

answer

Output attributed to last unit of labor applied

question

When does the peak of MP occur

answer

Before the peak average product

question

The law of diminishing marginal returns

answer

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?

answer

THREE

question

Stage 1 of Production?

answer

The average product is increasing

question

Stage 2 of Production?

answer

the average product is declining (but the marginal product is positive) - Decreasing returns (L2 to L3)

question

Stage 3 of Production?

answer

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

answer

- 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

answer

- 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

answer

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

answer

to minimize the total cost for a given output

question

What are Isocost lines

answer

the combination of inputs for a given cost, C

question

When rearranging optimal combination of inputs

answer

this becomes the equimarginal criterion

question

Returns to scale

answer

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

answer

- 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

answer

question

Meaning and measurement cost

answer

- 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

answer

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

answer

involve explicit historical costs

question

economic costs

answer

are based on making decisions these costs can be both IMPLICIT and explicit (labor, rent, supplies, etc)

question

Economic profit

answer

total revenues - explicit costs - implicit costs

question

How many contrasts between accounting and economic costs?

answer

THREE

question

Depreciation cost measurement

answer

question

Inventory Valuation

answer

Accounting valuation depends on its acquisition cost
- Economists view the cost of inventory as the cost of replacement

question

Skunk cost of underutilized facilities

answer

question

Long-run cost functions

answer

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

answer

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

answer

question

Curve relationship

answer

- workers and management become more efficient with experience
- the cost of production declines as cumulative volume of output increases

question

Percentage of learning

answer

the proportion by which costs are reduced through doubling output is estimated

question

Economies & Diseconomies of scale: Plant-level internal economics of scale

answer

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

answer

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

answer

question

U-shaped LRAC

answer

question

Solving for the TOTAL PRODUCT

answer

The Variable input x The Average Product

question

Solving for the AVG Product

answer

The total product / the variable input

question

Solving for the MARGINAL PRODUCT

answer

The current total product - the previous total product

question

The Variable input

answer

1,2,3,4,5 etc

question

Mass customization

answer

...

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Fin chap 7&8

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