question
Managers Manage Organization
answer
-managers manage organizations; therefore we must first ask the fundamental questions: what are organizations and why do they exist
-In order to understand why such organizations exist we first need to consider the benefits of co-operation and
specialization.
•In any organization different people perform different functions, each specializing in some particular activity.
•Adam Smith gave the famous example of the pin factory, where workers specialized in pulling a wire, straightening it, cutting it to a specific length, sharpening it to a point, attaching the head, or packaging the final product.
•The resulting output was much greater than would have
occurred if each worker had performed all the activities above
-In order to understand why such organizations exist we first need to consider the benefits of co-operation and
specialization.
•In any organization different people perform different functions, each specializing in some particular activity.
•Adam Smith gave the famous example of the pin factory, where workers specialized in pulling a wire, straightening it, cutting it to a specific length, sharpening it to a point, attaching the head, or packaging the final product.
•The resulting output was much greater than would have
occurred if each worker had performed all the activities above
question
business organization
answer
-buisness organizations are independent legal identities,
separate from the individuals that form them.
-This enables them to enter into binding contracts that can be enforced by the legal system
-This means that the firm simplifies business
transactions because it enables the firm to contract bilaterally with suppliers, distributors, workers, managers, investors and customers, rather than there being a situation where each party has to enter into complicated multilateral arrangement
separate from the individuals that form them.
-This enables them to enter into binding contracts that can be enforced by the legal system
-This means that the firm simplifies business
transactions because it enables the firm to contract bilaterally with suppliers, distributors, workers, managers, investors and customers, rather than there being a situation where each party has to enter into complicated multilateral arrangement
question
to buy or to make
answer
-this is the key question for all managers.
-The answer is... it depends on
transaction costs.
-According to Ronald Coase: The optimal method of organizing a given economic transaction is the one that minimizes
contracting costs.
•In some cases, the method will be
market exchange. In other cases, the
method will involve firms
-The answer is... it depends on
transaction costs.
-According to Ronald Coase: The optimal method of organizing a given economic transaction is the one that minimizes
contracting costs.
•In some cases, the method will be
market exchange. In other cases, the
method will involve firms
question
transactions
answer
-transtions can be performed in the following three ways:
1.Trading in spot markets (Pricing Mechanism)
2.Long-term contracts
3.Internalizing the transaction within the firm.
•Each of these has certain advantages and disadvantages related to the transaction costs involved
1.Trading in spot markets (Pricing Mechanism)
2.Long-term contracts
3.Internalizing the transaction within the firm.
•Each of these has certain advantages and disadvantages related to the transaction costs involved
question
types of transaction costs
answer
-search and information costs: cost incurred in identifying possibilities for mutual gains; identifying funding source; identifying relevant stakeholders; and cost of gathering information
-bargaining and decision costs : all costs that are associated w negotiating an agreement; time spent at meetings; time expensed in written and verbal communications
-policing and enforcement costs: c costs involved in making sure all parties stick to the agreement; employment of an external monitor; time and effort spent monitoring other informally
-bargaining and decision costs : all costs that are associated w negotiating an agreement; time spent at meetings; time expensed in written and verbal communications
-policing and enforcement costs: c costs involved in making sure all parties stick to the agreement; employment of an external monitor; time and effort spent monitoring other informally
question
to buy...
answer
-outsourcing production involves trust and contracting.
•
We will discuss types of contracts in a few weeks.
•
Allows the firm to fully specialize into an area of expertise.
•
Facebook and Google do not make their own computers...they "buy"
the computers via contracts
•
We will discuss types of contracts in a few weeks.
•
Allows the firm to fully specialize into an area of expertise.
•
Facebook and Google do not make their own computers...they "buy"
the computers via contracts
question
to make
answer
"Craft/artisanal" style:
-Each worker produces the whole product from start to end.
•"Jack of all trades master of none".
•Small scale
industrial production
-division of labor/specialization.
•Building experience, dexterity and
expertise.
•Ultimately, increases production and
efficiency.
•Large scale
-Each worker produces the whole product from start to end.
•"Jack of all trades master of none".
•Small scale
industrial production
-division of labor/specialization.
•Building experience, dexterity and
expertise.
•Ultimately, increases production and
efficiency.
•Large scale
question
transaction costs, firm size, and network effects
answer
-when a firm can reduce its transaction costs, whereby "buying" more and "making: less, the from can be smaller in size
-question: how has the internet allowed us to reduce transactions costs
-network effects: occur when a firms output improves in values as the number of users increases, notable examples: facebook, google, Microsoft, apple, and twitter
-the network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service
-the large network effects give firms increased market share
-reduced transaction costs allow facebook, and the like, to hire less employees but the network effects gives them a large market share (small and large firm at the same time)
-question: how has the internet allowed us to reduce transactions costs
-network effects: occur when a firms output improves in values as the number of users increases, notable examples: facebook, google, Microsoft, apple, and twitter
-the network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service
-the large network effects give firms increased market share
-reduced transaction costs allow facebook, and the like, to hire less employees but the network effects gives them a large market share (small and large firm at the same time)
question
production function
answer
- a production function shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good
-factors of production--> firm--> output
-factors of production--> firm--> output
question
firm
answer
an organization that combines inputs of labor, capital, la nd and raw or finished component materials to produce outputs
question
the production function
answer
-Mathematical function that defines the maximum feasible amount of
output that can be produced with a given set of inputs.
Q=F(k,L)
-Q=the level of output
-K=the quantity of capital input
-L=tthe quantity of labor input
output that can be produced with a given set of inputs.
Q=F(k,L)
-Q=the level of output
-K=the quantity of capital input
-L=tthe quantity of labor input
question
short run versus long run decisions: fixed and variable inputs
answer
-short-run
•Period of time where some factors of production (inputs) are fixed, and
constrain a manager's decisions.
•Long-run
•Period of time over which all factors of production (inputs) are variable, and
can be adjusted by a mana
•Period of time where some factors of production (inputs) are fixed, and
constrain a manager's decisions.
•Long-run
•Period of time over which all factors of production (inputs) are variable, and
can be adjusted by a mana
question
measures of productivity
answer
-total product
-average product
-marginal product
-average product
-marginal product
question
total product
answer
•Maximum level of output that can be produced with a given amount of inputs
question
average product (AP)
answer
-a measure of the output produced per unit of input
-APl=Q/L
-APk=Q/L
-APl=Q/L
-APk=Q/L
question
marginal product (MP)
answer
-the changes in total product (output) attributable to the last unit of an input
-MPL= change in Q/change in L
-MPK: change in Q/ change in K
-MPL= change in Q/change in L
-MPK: change in Q/ change in K
question
marginal product of labor in the short run
answer
-the marginal product of labor is likely to increase initially because when there are more workers, each is able to specialize in an aspect of the production process in which he or she is particularly skill
question
diminishing marginal returns
answer
-The marginal product of a variable input will decrease as the variable input increases while other inputs remain fixed.
•In other words, as you hire more and more baristas while keeping the number of espresso machines constant, the additional contribution of each additional employee gets diminished.
•In the case of workers, this is called the Diminishing Marginal Product of Labor
•In other words, as you hire more and more baristas while keeping the number of espresso machines constant, the additional contribution of each additional employee gets diminished.
•In the case of workers, this is called the Diminishing Marginal Product of Labor
question
diminishing marginal product of labor in the short run
answer
-The marginal product of labor will eventually diminish because there
will be at least one fixed factor of production, such as capital.
•As more and more labor is used along with a fixed amount of capital,
there is less and less capital for each worker to use, and the productivity of additional workers necessarily declines.
•Think for example of an office where there are only three
computers.
•As more and more employees try to share the computers, the
marginal product of each additional employee will diminish
will be at least one fixed factor of production, such as capital.
•As more and more labor is used along with a fixed amount of capital,
there is less and less capital for each worker to use, and the productivity of additional workers necessarily declines.
•Think for example of an office where there are only three
computers.
•As more and more employees try to share the computers, the
marginal product of each additional employee will diminish
question
MPL vs APL
answer
-you are an employer seeking to fill a vacant position on an assembly
line.
1.Are you more concerned with the average product of labor or the marginal
product of labor for the last person hired?
2. If you observe that your average product is just beginning to decline, should
you hire any more workers? What does this situation imply about the
marginal product of your last worker hire
line.
1.Are you more concerned with the average product of labor or the marginal
product of labor for the last person hired?
2. If you observe that your average product is just beginning to decline, should
you hire any more workers? What does this situation imply about the
marginal product of your last worker hire
question
MPL vs APL
answer
-filling a vacant position, you should be concerned with the marginal product of the last worker hired, because the marginal product measures the effect on output, or total product, of hiring another
worker.
•This in turn determines the additional revenue generated by hiring another worker,
which should then be compared to the cost of hiring the additional worker.
2.The point at which the average product begins to decline is the point
where average product is equal to marginal product. As more workers
are used beyond this point, both average product and marginal product
decline.
•However, marginal product is still positive, so total product continues to increase.
Thus, it may still be profitable to hire another worker
worker.
•This in turn determines the additional revenue generated by hiring another worker,
which should then be compared to the cost of hiring the additional worker.
2.The point at which the average product begins to decline is the point
where average product is equal to marginal product. As more workers
are used beyond this point, both average product and marginal product
decline.
•However, marginal product is still positive, so total product continues to increase.
Thus, it may still be profitable to hire another worker
question
the role of tha manager in the production process
answer
-produce output on the production function.
•Aligning incentives to induce maximum worker effort.
•Use the right mix of inputs to maximize profits.
•To maximize profits when labor or capital vary in the short run, the manager
will hire:
-labor until the value of the marginal product of labor equals the wage rate: VMP=W where VMPL= Px MPL
-vcapital until the value of the marginal product of capital equals the rental: VMPk=r, where VMPk=P x MPk
•Aligning incentives to induce maximum worker effort.
•Use the right mix of inputs to maximize profits.
•To maximize profits when labor or capital vary in the short run, the manager
will hire:
-labor until the value of the marginal product of labor equals the wage rate: VMP=W where VMPL= Px MPL
-vcapital until the value of the marginal product of capital equals the rental: VMPk=r, where VMPk=P x MPk
question
the role of the manager in the production process
answer
-value marginal product
: The value of the output produced by the last
unit of an input.
•Law of diminishing returns:
The marginal product of an additional
unit of output will at some point be lower than the marginal product
of the previous unit.
•Profit-Maximization input usage
•To maximize profits, use input levels at which marginal benefit equals
marginal cost
•When the cost of each additional unit of labor is w, the manager should
continue to employ labor up to the point where VMPL = w in the range of
diminishing marginal produc
: The value of the output produced by the last
unit of an input.
•Law of diminishing returns:
The marginal product of an additional
unit of output will at some point be lower than the marginal product
of the previous unit.
•Profit-Maximization input usage
•To maximize profits, use input levels at which marginal benefit equals
marginal cost
•When the cost of each additional unit of labor is w, the manager should
continue to employ labor up to the point where VMPL = w in the range of
diminishing marginal produc
question
algebraic forms of production functions
answer
-commonly used algebraic production function forms:
-linear: assumes a perfect linear relationship bw all inputs and total output
Q=F(K,L)= aK+bL, where a and ba re constants
-inputs are perfect substitutes
-linear: assumes a perfect linear relationship bw all inputs and total output
Q=F(K,L)= aK+bL, where a and ba re constants
-inputs are perfect substitutes
question
the linear homogenous production function
answer
-implies that with the proportionate change in
all the factors of production, the output also increases in the same proportion. Such as, if the input factors are doubled the output also gets doubled.
This is also known as
constant returns to a scale
-workers and capital are perfect substitutes
all the factors of production, the output also increases in the same proportion. Such as, if the input factors are doubled the output also gets doubled.
This is also known as
constant returns to a scale
-workers and capital are perfect substitutes
question
VMPL
answer
Price x MPL
-value marginal product of labor
-hire until VMPL Is equal to the wage
-decision making in whether or not to hire workers depends on VMPL
-value marginal product of labor
-hire until VMPL Is equal to the wage
-decision making in whether or not to hire workers depends on VMPL
question
VMPK
answer
-up to what point to we hire new capital
Price x MPKl
-rental rate of capital (r)
-deicision making on whether or not to hire new capital depends on VMPK
Price x MPKl
-rental rate of capital (r)
-deicision making on whether or not to hire new capital depends on VMPK
question
indifference curves
answer
-the higher the indifference curves the greater the utility
=isoquants (anywhere on line we can produce Q1 units; how we produce them is what varies); we can produce w only y or only x or with both
=isoquants (anywhere on line we can produce Q1 units; how we produce them is what varies); we can produce w only y or only x or with both
question
budget constraint
answer
=isocost
question
Leontief
answer
-assume that inputs are used in fixed proportions
Q=F(K,L)=min(aK,bL) where a and b are constants
-perfect compliments (ex. buy one right shoe and one left show; fixed proportion)
-special cases
Q=F(K,L)=min(aK,bL) where a and b are constants
-perfect compliments (ex. buy one right shoe and one left show; fixed proportion)
-special cases
question
inputs perfect copmlements
answer
-total product under fixed proportions production function is restricted by the lower of capital and labor
question
Cobb-douglas
answer
assumes some degree of substitutability among inputs
Q=F(K,L)=K^a x L^b
where a and b are constants
Q=F(K,L)=K^a x L^b
where a and b are constants
question
isoquants and marginal rate of technical substitution
answer
-isoquants capture the tradeoff between combinations of inputs that yield then same output in the long run, when all inputs are variable
-marginal rate of technical substitutions (MRTS)
-the rate at which a producer can substitute between inputs and maintain the same level of output
-absolue value of the slope of the isoquant
MRTSkl=MPL/MPK
-marginal rate of technical substitutions (MRTS)
-the rate at which a producer can substitute between inputs and maintain the same level of output
-absolue value of the slope of the isoquant
MRTSkl=MPL/MPK
question
diminishing marginal rate of technical substitution
answer
-cost of labor and cost of capital determine our budget
-combination of inputs that yield the same cost
-wL +rK = C
-or, re-arranging to the intercept-slope formulation
K=C/r-W/rL
changes in isocosts
-for given prices, isocosts farther from the origin are associated with higher costs
-changes in input prices change the slopes of isocost lines
-combination of inputs that yield the same cost
-wL +rK = C
-or, re-arranging to the intercept-slope formulation
K=C/r-W/rL
changes in isocosts
-for given prices, isocosts farther from the origin are associated with higher costs
-changes in input prices change the slopes of isocost lines
question
isocost and changes in isocosts lines
answer
cost minimization: producing at the lower possible cost
-cost minimizing input:
-produce at a given level of output where the marginal product per dollar spent is equal for all input:
MPL/w=MPK/r
-equivalently, a firm should employ inputs such that the marginal rate of technical substitution equals the ratio of input prices:
MPL/MPK=w/r
-cost minimizing input:
-produce at a given level of output where the marginal product per dollar spent is equal for all input:
MPL/w=MPK/r
-equivalently, a firm should employ inputs such that the marginal rate of technical substitution equals the ratio of input prices:
MPL/MPK=w/r
question
cost minimization and the cost minimizing input rule
answer
To minimize the cost of producing a given level of output, the firm should use less of an input and more of other inputs when that input's price rises
question
Optimal Input Substitution
answer
-Mathematical relationship that relates cost to the cost
-minimizing output associated with an isoquant
short run costs:
-fixed costs (FC): do not change w changes in output; include the costs of fixed inputs used in production
-sunk cost (irrelevant w decision making)
-variable costs (VC(Q))=costs that change w changes in outfits; includes the costs of inputs that vary w output
-total costs: TC(Q)= FC+ VC(Q)
long-run costs
-all costs are variable
-no fixed costs
-minimizing output associated with an isoquant
short run costs:
-fixed costs (FC): do not change w changes in output; include the costs of fixed inputs used in production
-sunk cost (irrelevant w decision making)
-variable costs (VC(Q))=costs that change w changes in outfits; includes the costs of inputs that vary w output
-total costs: TC(Q)= FC+ VC(Q)
long-run costs
-all costs are variable
-no fixed costs
question
the cost function
answer
-average costs:
-average fixed costs: AFC=FC/Q
-Average variable costs: AVC=VC(Q)/Q
-average total cost: ATC=C(Q)/Q
marginal cost(MC)
-the (incremental) cost of producing an additional unit of output
-MC=change in C/ change in Q
-average fixed costs: AFC=FC/Q
-Average variable costs: AVC=VC(Q)/Q
-average total cost: ATC=C(Q)/Q
marginal cost(MC)
-the (incremental) cost of producing an additional unit of output
-MC=change in C/ change in Q
question
short run costs
answer
In the long run, all costs are variable since a manager is free to adjust levels of all inputs.
question
average and marginal costs
answer
a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
question
The Relationship between Average and Marginal Costs
answer
exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms
-cheaper to produce goods together than separately
-C(Q1,0)+ C(0, Q2) > C(Q1,Q2)
-cheaper to produce goods together than separately
-C(Q1,0)+ C(0, Q2) > C(Q1,Q2)
question
long run costs
answer
Exist when the marginal cost of producing one type of output decreases when the output of another good is increased
change in MC1 (Q1,Q2)/ change in Q2 < 0
change in MC1 (Q1,Q2)/ change in Q2 < 0
question
long-run average cost curve
answer
undefined
question
economies of scope
answer
undefined
question
cost complementarity
answer
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