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Chapter 5

BUS 207 Chapter Notes - Chapter 5: Ulog

Business Administration
Course Code
BUS 207
Karen Ruckman

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 Production and cost are closely linked.
-?©e production manager strives to produce any given level of output at minimal total
cost and continually seeks less costly ways to produce te firm¶s goods and services.
 transforms inputs into outputs.
-?It is convenient to refer to two main categories of inputs: labour and materials and
long-term capital.
?0abour and materials includes production workers, marketers and managers at
all levels as well as raw materials and intermediate goods, including parts,
water, electricity, etc.
?Capital includes buildings, equipment and inventories.
©e firm¶s  indicates te maximum level of output te firm can produce
for any combination of inputs.
-?Example: £.
?©is states tat te firm¶s quantity of output depends on te respective
quantities of labour (0 and capital (K.
?©e firm¶s production function specifies te ÀÀÀ output for a given
combination of inputs (it assumes tat managers¶ use inputs efficiently.
 In te J one or more of te firm¶s inputs is fixed (cannot be varied.
 In te  te firm can vary  of its inputs.
-?©ere is no universal rule for distinguising between te sort and long run; te
dividing line must be drawn on a case-by-case basis.
 Inputs tat cannot be canged in te sort run are called  !".
-?Example: A firm¶s production facility.
[#!" are inputs tat can be freely varied.
-?Example: 0abour.
©e c is te additional output produced by an additional unit of labour, all
oter inputs eld constant.
-?Example: Matematically, labour¶s marginal product is MP0 = dQ/d0 (labour¶s
marginal product is te cange in output per unit cange in labour input.
?Increasing te number of workers allows for á of labour, workers
devoting temselves to particular tasks, wic results in increased output per
?Wen MP0 is large, te total product curve is steep.
?As MP0 declines, te curve becomes less steep.
?©e product curve peaks wen MP0 approaces zero and begins to decline
wen MP0 becomes negative.
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$%&'"c" As units of one input are added (wit all oter
inputs eld constant, resulting additions to output will eventually begin to decrease; tat is,
marginal product will decline.
©e law of diminising returns means tat te firm faces a basic trade-off in determining its
level of production.
-?By using more of a variable input, te firm obtains a direct benefit, increased output,
in return for incurring an additional input cost.
 Marginal revenue product is te formal name for te marginal revenue associated wit
increased use of an input.
-?An input¶s c* is te extra revenue tat results from a unit
increase in te input.
0abour¶s MRP0 can be expressed as ccc.
-?In calculus terms, c++££+.
-?(MR denotes marginal revenue per unit of output.
©e c"%! is te amount an additional unit of te input adds to te firm¶s
total cost.
©e additional profit from adding one more worker is te revenue generated by adding te
worker less te worker¶s marginal cost: cåcc.
-?©e firm sould continue to increase its labour force so long as te amount of
additional revenue (MRP0 is greater tan te additional cost (MC0 but due to
diminising marginal returns, labour¶s marginal revenue product will eventually fall.
?©o maximize profit, te firm sould increase te amount of a variable input up
to te point at wic te input¶s marginal revenue product equals its marginal
cost: cc.
?After tis point, te marginal cost of labour will exceed te marginal
revenue product of labour and profits will decline.
 In te long run, a firm as te freedom to vary all of its inputs; two aspects of tis flexibility are
-?First, a firm must coose te proportion of inputs to use.
-?Second, a firm must determine te scale of its operations.
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