ECONOMICS FOR MANAGERS

PSG INSTITUTE OF MANAGEMENT M B A 2 0 1 1 - 1 3 B AT C H

I TRIMESTER
S E S S I O N V I - F O R B AT C H C A N D D

The turn of events at Nokia

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Nokia, the largest seller of mobile phones by volume,

said it planned to cut more than the 1 billion euros ($1.43 billion) it had previously planned to trim from its operating expenses by 2013. It announced the new plan as it reported a loss of 368 million euros in the second quarter. Nokia said its sales fell 7 percent in the second quarter, to 9.275 billion euros from 10 billion euros a year earlier. Nokias shares rose 2.5 percent as investors welcomed the handset makers intention to increase its austerity measures. (From New York Times -21/07/11).
EFM Faculty P.Uday Shankar

29th Aug 2011

Production
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Production is the Creation of Goods and

Services from Inputs and Resources.

( Thomas & Maurice)

While it is easy to quantify the inputs used for production of a pumpset it would be difficult to quantify inputs like the resources from teachers in an educational institution which render Services. Therefore, the examples in the study of production revolve around agriculture, industry and government production.

EFM Faculty P.Uday Shankar

29th Aug 2011

Production Function
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A production function is the link between

levels of input usage and levels of output. It is the relationship between physical rates of output and physical rates of input usage. At a given state of technology , the attainable quantity of output depends on the quantities of the various inputs employed in production.

EFM Faculty P.Uday Shankar

29th Aug 2011

Production Function
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Q= f(X1,X2,X3,.., Xn)
where maximum output Q is the function of the level of usage of the various inputs X. Generally discussions on production hover around the two key inputs Labour and Capital. The production function in that case would be:

Q= f(L,K) where L is Labour and K is Capital.

EFM Faculty P.Uday Shankar

29th Aug 2011

Production Efficiency
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Technical Efficiency: Technical efficiency is

achieved when the maximum possible amount of output is being produced with a given combination of inputs.
Eg. A pumpset manufacturer realises that a particular machine was under-utilised and was involving more labour. He decides to use the machine to full capacity and redeploy labour to the packaging section where there was labour shortage.

Economic Efficiency: Economic Efficiency is

achieved when the firm is producing a given amount of output at the lowest possible cost.
EFM Faculty P.Uday Shankar

29th Aug 2011

Fixed and Variable Inputs

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A Fixed Input is one for which the level of usage

cannot readily be changed. For eg. Buildings, major machinery, managerial personnel. (Though none of these are fixed in the real sense).
A Variable Input is one for which the level of

usage may be changed quite readily in response to desired changes in the output. For eg. Labour at the lowest level, raw materials

EFM Faculty P.Uday Shankar

29th Aug 2011

Short Run Production Function

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A Short Run is that period of time in which the

usage of one or more variables is fixed. The Short Run production Function will then be:

Q= f(L, ) or Q= f(L)
The bar on K denotes that K- Capital is considered fixed and only labour is considered as a variable input for the purpose of determining output.
For instance casual labourers in a factory may be increased in order to increase the output. Similarly, L could be fixed when considering Capital as a variable.
EFM Faculty P.Uday Shankar

29th Aug 2011

Long Run Production Function

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Long Run refers to that time in the future when

all inputs are variable inputs. In other words in the long run output can be varied by changing the levels of both labour and capital.

Q= f(L,)
Many short run situations combine together to give a firm what can be called as Planning Horizon.

EFM Faculty P.Uday Shankar

29th Aug 2011

Production Table for Production Function Q= f(L,) Rate of Capital Input (K) 8 7 6 5 4 3 2 1 283 265 245 224 200 173 141 100 1 400 374 346 316 283 245 200 141 2 490 458 424 387 346 300 245 173 3 565 529 490 447 400 346 283 200 4 632 592 548 500 447 387 316 224 5 693 648 600 548 490 424 346 245 6 748 700 648 592 529 458 374 265 7 800 748 693 632 565 490 400 283 8

Rate of Labour Input

EFM Faculty P.Uday Shankar

10

29th Aug 2011

Substitutability
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From the table we can see that there are many ways of producing a

particular rate of output. For instance, 245 units of the produce can be produced with any of the following input combinations:
Combination a b K 6 3 L 1 2

c
d

2
1

3
6

This shows the Substitutability between the factors of production. For eg. Combination a is capital-intensive; d is labour intensive; and b and c are between both. Managers use these combinations in response to changes in relative prices of the inputs.

EFM Faculty P.Uday Shankar

29th Aug 2011

Returns to Scale
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If input rates are doubled the output rates are also doubled.

K
1 2

L
4 8

Output
200 400

Returns to Scale is the relationship between output change and

proportionate changes in both inputs to scale. This sort of situations occur mostly in an industry where we have only a few large firms. For eg. The automotive industry in Chennai.

EFM Faculty P.Uday Shankar

29th Aug 2011

Returns to Factor
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In contrast to Returns to Scale where both the

inputs were manipulated, Returns to Factor happens when output changes because one input changes while the other remains constant. For instance if the rate of capital input is kept constant at 2 and if labour is increased from L=1 to L=6, the successive increases in output are 59, 45,38, 33 and 30.

EFM Faculty P.Uday Shankar

29th Aug 2011

Thanks
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EFM Faculty P.Uday Shankar

29th Aug 2011