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