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Managerial Economics Essay

3067 words - 13 pages



* Adrian Mchunguzi 2210500…./T13

Find an organization of your interest and (advised to pick an organization of one of the group members) and explain in detail how one of the aspects of managerial economics are applied in practice.)

* ...view middle of the document...

In other hand, production function means the relationship between inputs and outputs.

Input is anything that the firm employs in the production process and the output is what the firm produces using the inputs (Damodaran Suma, 2008- pp 144). In case of TPCC, produce cement as its primary output But to manufacture cement it needs labour (Engineers, Accountants, Economists e.t.c), it needs capital (energy like petrol, electricity and Diesel, raw materials like water and limestone, Machinery), and it also needs land onwhich all economic activities take place including buildings.

The production function can be expressed as an equation, table or graph presenting the maximum amount of a commodity that a firm can produce from a given set of inputs during a period of time.
Mathematically, Q = f (a, b, c.....z), where a, b, c and z are various inputs such as land, labour, capital and energy whereas Q, is the level of output.

1.2 Application of production function in TPCC
The concept of production function portrays the ways in which the factors of production are combined by a firm to produce different levels of output. More specifically, it shows the maximum volume of physical output available from a given set of inputs or the minimum set of inputs necessary to produce any given level of output. The production function has various applications to TPCC in the following economic decisions:

* It is used to compute the least-cost factor combination for a given output or the maximum output combination for a given cost. Consider commodity X which is produced by using two inputs labour and capital and there are two production factories A and B:

Table 1: Production input combination to produce 20 tonnes of cement per week.
Production input | Labour | Capital |
Factory A | 4 | 5 |
Factory B | 6 | 5 |
Source: Maheshwari, Yogesh, Sultanchand and Sons (2009)

In the above table, factory B is inefficient compared to factory A because B uses more of labour and same amount of capital as compared to method A while they produce the same output of 20 tonnes. It applies at TPCC where management evaluate alternatives available to produce the required quantity of cement at minimum cost.

* According to Adhikary, M (2000), Knowledge of production function applies to a firm in deciding on the value of employing a variable factor in the production process. TPCC applies this knowledge by ensuring the marginal revenue productivity of a variable factor exceeds its price, it is profitable to increase its use. When the marginal revenue productivity of the factor becomes equal to its price the additional employment of the factor should be stopped because no profit generated by that factor.

* The production function helps TPCC in return to scale decision making. If the returns to scale are diminishing, it is not worthwhile to increase production. The opposite will be true if the returns to scale are...

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