managerial economics 11th edition - cii institute of logistics

MANAGERIAL ECONOMICS 11th Edition,ByMark Hirschey,Production Analysis and Compensation Policy,Chapter 8,Chapter 8OVERVIEW,Production FunctionsTotal, Marginal, and Average ProductLaw of Diminishing Returns to a FactorInput Combination ChoiceMarginal Revenue Product and Optimal EmploymentOptimal Combination of Multiple InputsOptimal Levels of Multiple InputsReturns to ScaleProduction Function EstimationProductivity Measurement,Chapter 8 KEY CONCEPTS,production functiondiscrete production functioncontinuous production functionreturns to scalereturns to a factortotal productmarginal productaverage productlaw of diminishing returnsisoquanttechnical efficiencyinput substitutionmarginal rate of technical,ridge linesmarginal revenue producteconomic efficiencynet marginal revenueisocost curve (or budget line)constant returns to scaleexpansion path increasing returns to scaledecreasing returns to scaleoutput elasticitypower production functionproductivity growthlabor productivitymultifactor productivity,Production Functions,Properties of Production FunctionsProduction functions are determined by technology, equipment and input prices.Discrete production functions are lumpy.Continuous production functions employ inputs in small increments.,Returns to Scale and Returns to a Factor,Returns to scale measure output effect of increasing all inputs.Returns to a factor measure output effect of increasing one input.,Total, Marginal, and Average Product,Total ProductTotal product is total output.,Marginal Product,Marginal product is the change in output caused by increasing input use.If MPX=Q/X 0, total product is rising.If MPX=Q/X 0, total product is falling (rare).Average productAPX=Q/X.,Law of Diminishing Returns to a Factor,Diminishing Returns to a Factor ConceptMPX tends to diminish as X use grows.If MPX grew with use of X, there would be no limit to input usage. MPX 0 implies irrational input use (rare).Illustration of Diminishing Returns to a Factor,Input Combination Choice,Production IsoquantsTechnical efficiency is least-cost production.Input Factor SubstitutionIsoquant shape shows input substitutability.C-shaped isoquants are common and imply imperfect substitutability.,Marginal Rate of Technical Substitution,MRTSXY=-MPX/MPYRational Limits of Input SubstitutionMPX0 or MPY 1 implies increasing returns.Q = 1 implies constant returns.Q 1 implies decreasing returns.Returns to Scale Estimation,Production Function Estimation,Cubic Production FunctionsDisplay variable returns to scale.First increasing, then decreasing returns are common.Power Production FunctionsAllow marginal productivity of each input to vary with employment of all inputs.,Productivity Measurement,How Is Productivity Measured?Productivity measurement is the responsibility of the Bureau of Labor Statistics (since 1800s).Productivity growth is the rate of change in output per unit of input.Labor