Lecture Managerial economics - Chapter 3: Production, costs and supply

Lecture Managerial economics - Chapter 3 presents content: Inputs, outputs, and decisions; outputs, inputs, and business firms; economic cost concept; two types of management problems; cost structure; managerial accounting;... Inviting you to refer.
Nội dung trích xuất từ tài liệu:
Lecture Managerial economics - Chapter 3: Production, costs and supplyPRODUCTION, COSTS AND SUPPLYInputs, Outputs, and DecisionsTYPICAL ORGANIZATION CHART OF A FIRMPRODUCTION Production is the act of transforming resources into goods and services that are more valuable. For example, oil is extracted from the ground, refined into gasoline, and used as transportation fuel. A hair stylist uses time, scissors, and chemicals to make a customer feel more attractive and self-confident, which is potentially of great value for a job interview.OUTPUTS, INPUTS, AND BUSINESS FIRMSA firm is an entity combines inputs to produce output. A firm’s production function is the relationship between it’s inputs and output.OUTPUTS, INPUTS, AND BUSINESS FIRMS For every bundle of inputs the production function shows the maximum output that can be produced. Here we assume that all inputs are the same within their classification; i.e., all labor is homogeneous We also assume one person that makes all decisions on inputs and outputs and is the residual claimant (pockets the profits). There are no conflicts in this hypothetical world.ECONOMIC COST CONCEPTOpportunity cost: next best alternative use • The real cost is what you give up to get it • In economics, all the costs are measured by opportunity cost. • Opportunity cost includes explicit and implicit costs–includes time value of searching/waiting Example: opportunity cost might even help explain why higher earners spend less time asleep on average than those who make less.TWO TYPES OF MANAGEMENT PROBLEMS Decision Making• Which product should we be producing?• How should we price our products? Opportunity matters cost• What strategy should we be pursuing?• Should we be in this business? Control• Are our managers performing well? Accounting cost matters• Are our businesses performing well?• How can we influence the behavior of our people?COST STRUCTUREEconomic Cost Structure (Opportunity Costs) • Fixed Cost: Costs that do not vary with quantity produced • Variable Cost: Cost that do vary with quantity • Sunk Cost: Costs that cannot be avoided regardless of actionAccounting Cost Structure (COGS) • Direct Cost: Labor and Materials • Indirect Cost: Overhead Cost – accountants sometimes call this as “fixed cost”, which is not fixed cost in economics » some overhead cost does vary with quantity (“avoidable”), NOT fixed. » Ex. Production supplies, tools, benefits vary with quantityIn general, Accounting cost ≠ Economic costMANAGERIAL ACCOUNTINGFor decision making problems, opportunity costmatters.• But often in practice, opportunity costs are not given.• Instead, you need to make business decisions based on financial statement which shows accounting costs.How to translate the accounting cost intoopportunity cost? Course of Managerial AccountingQUESTION: FIXED OR SUNK?Fixed cost • A past expenditure that can be recovered by reselling –ex: cost of equipment that may be recouped by equipment saleSunk cost • A past expenditure that cannot be recovered –R&D investment in pharmaceutical companies •Principle: Let bygone be bygone • Sunk costs “should not” influence an individual’s or firm’s decisions. –Why?DISCUSSIONYou bought a theater ticket for $15 a few weeks ago.Bad news: • At the theater you find you left the ticket at your home and it’s too late to go back.Good news: • But you can still buy a comparable ticket for $15 at the box office Q: Will you buy a new ticket & see the show? Q: Which is the rational decision?IS SUNK COST BAD FOR THE BUSINESS?Suppose you are running a business and foundthat you incurred a huge sunk cost in theprevious quarter.Q: Is this good or bad for your company?SUNK, FIXED, VARIABLE COSTDiscuss the cost structure for the following industries 1. Computer Industry 2. Software Industry 3. Pizza IndustrySUMMARY1. Principle: The real cost is what you give up to get it. • Economic cost is the opportunity cost2. Opportunity cost matters for decision making, accounting cost matters for control purpose.3. Principle: Let bygone be bygone • Don’t consider the sunk cost when making decisionSUPPLY CURVESUPPLY CURVE  1. Supply curve = Marginal Cost curve  2. When does the supply curve shift?  3. Producer Surplus SUPPLY CURVE = MARGINAL COST CURVE• In a competitive market, where you can’t change the priceSupply curve = (Marginal) cost curveImplications? • If anything happens to the cost, the supply curve changes (shifts)SUPPLY CURVE SHAPEQ: COST INCREASE = PRICE INCREASE?SUPPLY CURVE “SHIFTERS”IMPACTS ON SUPPLY ARISING FROM CHANGES IN SUPPLYDETERMINANTS ...