MASTER IN BUSINESS ADMINISTRATION FOR EXECUTIVES

MASTER IN BUSINESS ADMINISTRATION FOR EXECUTIVES

MBA 208E BUSINESS ECONOMICS (BUSECO)

BY: WILSON J. TULINGIN

SOUTHWESTERN UNIVERSITYGraduate School of Health Science, Management and Pedagogy

Cebu City

THE ECONOMICS OF PRODUCTION AND PRODUCTIVITY

MODULE 5

THE ECONOMICS OF PRODUCTION

TABLE 1.0 LAND (HECTURE)

LABOR (NUMBER OF MEN)

OUTPUT (CAVANS OF PALAY)

1 1 60

1 2 68

1 3 80

1 4 87

1 5 92

1 6 92

1 7 86

THE LAW OF DIMINISHING RETURNS

• AS THE FIRM USES MORE AND MORE UNITS OF A FACTOR OF PRODUCTION, WITH THE OTHER RESOURCES CONSTANT, TOTAL OUTPUT WILL INCREASE BUT A POINT WILL BE REACHED BEYOND WHICH THE INCREASE IN OUTPUT WILL BECOME SMALLER AND SMALLER

MARGINAL PHYSICAL PRODUCT (MPP)

• THE MPP OF A PRODUCTION FACTOR IS THE INCREASE IN TOTAL OUTPUT BROUGHT ABOUT BY AN INCREASE OF ONE UNIT OF THE FACTOR, WITH THE OTHER FACTORS CONSTANT.

MPP (MARGINAL PHYSICAL PRODUCT)

LAND(HECTARE)

LABOR (NO. OF MEN)

OUTPUT (CAVANS OF PALAY)

MARGINAL PHYSICAL PRODUCT OF LABOR (MPP)

1 1 60(68-60) / (2-1) = 8

1 2 68

1 3 80 12

1 4 87 7

1 5 92 5

1 6 92 0

1 7 86 -6

OPTIMAL COMBINATION OF RESOURCES

HOW DOES A FIRM FIND THE RIGHT COMBINATION OF ITS RESOURCES TO PRODUCE THE MAXIMUM OUTPUT AT THE LEAST COST?

THE FIRM CAN ARRIVE AT AN OPTIMAL COMBINATION BE DETERMINING THE PRIZES AND THE MARGINAL PHYSICAL PRODUCTS OF ITS RESOURCES.

EX. A firm employs two factors, A and B , in making its product Y. the price of factor A is P2/unit and that of

factor B is P1/unit. The budget for the two resources is P25. How many units of A and B should the firm use?

A(UNIT OF INPUT)

MPPA

(UNIT OF OUTPUT Y)B(UNIT OF INPUT)

MPPB

(UNIT OF OUTPUT Y)

4 13 8 9

5 12 9 8

6 11 10 6

7 10 11 5

8 8 12 3

9 5 13 2

10 1 14 0

NUMERICAL APPROACH

MPPA / PA = 10/2 = 5MPPB/ PB = 5/1 = 5

Therefore;MPPA/PA = MPPB/PB

-Optimum combination is attained when the MPP/P, the marginal productivity of a peso employed for a specific factor, is the same for all factors.

ISOQUANT-ISOCOST APPROACH

• Another METHOD OF FINDING THE OPTIMAL COMBINATION OF FACTORS

• A PRODUCT ISOQUANT CAN BE DEFINED AS THE VARIOUS COMBINATION OF TWO FACTORS OF PRODUCTION THAT YIELD EXACTLY THE SAME LEVEL OF OUTPUT.

ISOQUANT-ISOCOST APPROACH

• Ex. A firm is thinking of producing 50 pairs of pants. Fifty pairs of pants can be produced in different manners. There can be as many combination of capital (scissors, sewing machine, mechanized equipment) and labor (seamstresses, machine operator) as there are techniques of producing a given number of pairs of pants.

ISOQUANT CURVE:CAPITAL LABOR

A 10 units 2 units

B 8 3

C 5 5

D 3 8

Using more of both labor and capital would always yield higher levels of output.

ISOCOST LINE

• Another tool needed in the analysis of the production function.

• It shows the different combination of two factor which the firm can buy given the price per unit of the factors and the total budget for the factors.

ISOCOST LINE

• Ex. A firm has a budget of P300 on the two factors of production, labor and capital. The price of a unit of capital is P30, while the price of a unit of labor is P10.

Combination of labor and capitalCOMBINATION CAPITAL LABOR

W 10 0

X 7 9

Y 4 18

Z 0 30

An ISOCOST map showing numerous ISOCOST lines representing different budgets can be

constructed.

Putting together the ISOQUANT/ISOCOST lines

PRODUCTIVITYThe Economics of

PRODUCTIVITY

• A RELATIONSHIP BETWEEN PRODUCT OUTPUT AND THE INPUT RESOURCES.

• RATIO OF OUTPUT TO INPUT.

The measurement of productivity

A. Total productivity of the FactorsTotal productivity of the factors = Total output/Total inputTotal output = monetary value of all the firm’s products services.Total input = monetary value of all input factors such as labor, raw materials, equipment and capital.


B. Total productivity of a FactorTotal productivity of a factor = Total output/ input of specific factorExample:1. Specific productivity of labor = Total output/Labor input2. Specific productivity of raw materials = Total output/ Raw materials input


C. Net productivity of a FactorNet productivity of a factor = Net product attributed to a factor/ input of the factor

Net product attributed to a specific factor = Total output less all the other input factors except the specific factor.

The net productivity of a factor is expressed in monetary values.


D. Contributed Value ProductivityContributed value productivity= Contributed value / company inputs (labor and capital)

Contributed value = total output less the amount paid for raw materials, labor and services rendered by outside supplies.

Illustration I (Summary of company’s operations)

PERIOD I PERIOD II

I. REVENUE P 100,000 P 210,000

PRICE/UNIT P 4 P 6

PRODUCTION VOLUME 25,000 units 35,000 units

II. OPERATING COST P 80,000 P 153,500

A. RAW MATERIALS P 45,000 P 90,000

USAGE 30,000 units 45,000 units

B. LABOR P 20,000 P 36,000

NO. OF MAN-HOURS P 16,000 P 24,000

COST/MAN-HOUR P 1.25 P 1.50

C. EQUIPMENT P 15,000 P 27,500

NO. OF MACHINE-HOURS P 7,500 P 11,000

COST/MACHINE-HOUR P 2.00 P 2.50

III. NET INCOME P 20,000 P 56,500

COMPUTATIONS:PERIOD I PERIOD II

TOTAL PRODUCTIVITY 1.25 1.37

SPECIFIC PRODUCTIVITY

RAW MATERIALS 2.22 2.33

LABOR 5.00 5.83

EQUIPMENT 6.67 7.64

NET PRODUCTIVITY


LABOR 2.00 2.57

EQUIPMENT 2.33 3.05

PERIOD 2 AT PRIZES OF PERIOD 1PERIOD I PERIOD II




LABOR 5.00 4.67

EQUIPMENT 6.67 6.37

NET PRODUCTIVITY


LABOR 2.00 1.68

EQUIPMENT 2.33 1.93

PERIOD 1 AT PRIZES OF PERIOD 2PERIOD I PERIOD II




LABOR 6.25 5.83

EQUIPMENT 8.00 7.64

NET PRODUCTIVITY


LABOR 2.97 2.57

EQUIPMENT 3.52 3.05

CONCLUSION:

• THE COMPANY WAS MORE PRODUCTIVE IN PERIOD 1 THAN PERIOD 2 BECAUSE IT UTILIZED THE INPUT FACTORS MORE EFFICIENTLY IN PERIOD 1 THAN IN PERIOD 2. ON A PER UNIT BASIS, PERIOD 1 OPERATIONS USED LESS RAW MATERIALS AND EXPENDED LESS MAN-HOURS AND MACHINE-HOURS THAN PERIOD 2.

HIGHLIGHTS:• The cost of producing a good or services can be ultimately traced to the

quantities and the prices of various inputs needed for its production. A business firm which wants to be efficient in production must either: (a) maximize its output given specific quantities of the factors of production it employs; (b) find the right combination of different inputs to produce the required output at the least cost.

• As a firm uses more and more units of a factor of production, with the other resources remaining constant, total output will increase but a point will be reached beyond which the increase in output will become smaller and smaller. This is attributed to the law of diminishing returns.

• The marginal physical product (MPP) of a production factor or resources is the increase in total output brought about by an increase of one unit of the factor with the other factors constant. By determining the MPP and the prices of its resources, the firm can arrive at an optimal combination of its inputs – hence, greater efficiency in production.

HIGHLIGHTS:• Another analytical method of finding the optimal

combination of factors is through the use of isoquant-isocost curves. A product isoquant can be defined as the various combinations of two factors of production that yield exactly the same level of output. The isocost line, on the other hand, shows the different combinations of two factors which the firm can buy given the prize per unit of each factor and the total budget for the factors.

• Productivity is a relationship between the output and the input resources; it is the ratio of output to input. It should be emphasized that productivity is different from production. Whereas the latter is concerned with how much is produced in absolute terms, the former deals with how much output can be produced for every unit of input.

THE ECONOMICS OF FINANCEMODULE 5

ECONOMICS OF FINANCE

• Since the firm’s today depends upon the expected stream of earnings that it will generate in the future and the riskiness of these projected future earnings, the task of efficiently allocating the firm’s resources through time boils down to a predominantly financial problem.

Theoretical framework

• All analyses of financial theory rest on initial assumptions about the environment in which finance takes place and about the participants in the finance process. Three such assumptions may be set forth:– Rationality– Perfect markets– Certainty

Rationality• Refers to the behavior of individuals and firms in aiming to

maximize the satisfaction they derive from the management of economic assets.

• This can have several implications: maximizing satisfaction can mean maximizing welfare or utility or getting greatest profits. But the usual meaning of rationality for the firm points to maximizing the value of the firm to its stock-holders.

• Rational behavior can be translated in terms of risk and return. Assuming risk is constant – or non-existent – for the moment, rationality means that one will prefer more returns to less, and will and will act in his own interest. In other words, there is the move towards maximizing returns and minimizing risk. And this behavior is universal.

Perfect markets

• Refer to all markets (for goods, for labor, and especially for capital), operating under perfect competition setting. This implies that (a) there is plurality of buyers and sellers so that no one, on his own, can influence the price level; (b) there I full knowledge about prizes and all relevant information; (c)there is full freedom of entry and exit; and (d) there is mobility of resources

Certainty• The assumption of certainty means that everybody has

exact and complete agreement on future event; in particular, those regarding future incomes, cash flows, dividends, etc.

• This also implies that risk does not exist, as there is foreknowledge and forewarning, as it were, about future events.

• There is exact evaluation of all undertakings.• Finally, under certainty conditions, the effects of

exogenous variables (outside the financial markets) will be foreseen and incorporated into the decision-making process.

Highlights• The three initial assumptions are so restrictive that

they actually assume away the three basic decision areas in corporate finance: the investment decision, the financing decision and the dividend decision. Within its budget level , the firm will choose to invest in any and all projects with a non-negative present value. With the same assumptions, there is no difference whatever between the forms of financing, and therefore, there is essentially no financing decision. The problem of dividends does not arise, since the firm will just pay out whatever portion of earnings it cannot invest internally to earn at least the cost of capital.

Highlights• Most problems in finance can be reduce to a trade-off

between perceived risk and expected return. The usual rule is: the higher the risk, the higher the return. Owing to the flexibility of financial instruments and the facility with which the resource (money) is moved, the markets for money and capital – when compared to other sectors – have relatively few imperfections.

• The theories and concepts of economics of finance – specifically, in testing whether the returns of financial assets are sufficient to cover the inflation – find expression in the fact that the Philippine capital market fails to account for the impact of inflation.

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MASTER IN BUSINESS ADMINISTRATION FOR EXECUTIVES