Managerial Economics: Decisions, Technology, and Market Dynamics
Short-Run and Long-Run Managerial Decisions
Short-run: Use plant and equipment efficiently and profitably. Types of decisions: capacity utilization. Analysis is the same as in the previous version.
Long-run: Determine desired capacity. Decide on the type of plant to install. Types of decisions: investment decisions.
Sources of Knowledge
Hiring employees of rival companies:
- Good sources of information about the production process
Technology Implementation
Technology is a means of converting raw inputs, such as steel, labor, and machinery, into an output. It represents engineering know-how and is affected by managerial decisions to invest in R&D and other technology sources.
Sources of technology:
- Independent R&D
- Licensing technology
- Patents
- Reverse engineering
- Trade publications
- Technical meetings
- Employee socializing
Changing Factors in the Production Function
Production function:
- Factors of production: Land, Labor, Capital (machinery)
Certain outputs can be produced with different combinations of input factors. Conclusion: factors can be substituted.
Isoquant is a basic tool for determining what combination of inputs is the best.
- Shows combinations of inputs (K and L) that result in the same level of output
General Optimization Conditions
Output elasticity is the percentage change of output divided by the percentage change of an input.
Manager’s Function in Value Creation
Managers find ways to organize, recombine, and coordinate resources, take risks, and use skills and knowledge to create new value and reduce costs.
Managerial tasks:
- Determine output
- Optimally choose the type and quality of inputs
- Select the right number and mix of employees regarding their competencies
- Substitute among inputs as input prices change (wages vs. price of capital)
- Select technology
Cobb-Douglas Production Function
We can use it in different industries:
- Furniture
- Chemical industry
- Graphical industry
- Food and beverages
- Plastic
- Tools and appliances
Technological Progress
- Technological progress means that production functions can shift over time
- Achieve more output from a given combination of inputs
- Achieve the same amount of output from lesser quantities of inputs
Network Ownership
Network has an owner:
- Bears the costs and charges a price to participants
- Output level Q*, corresponding price P*
- Price is less than marginal cost
- The owner is not making losses
- Profits arise from the positive slope of the AR and MR curves
- Socially optimal or economically efficient level of network participation is where MB=MC, which is the level of output provided in an owned network
- Network effects are not an externality
Network not owned by anyone:
- Participants pay the marginal cost of joining
- Participants join up to the point Q where MC=AB
- Each participant takes into account the benefits to themselves from joining, ignoring the benefit that the other network members receive from the consequent expansion of the network
Coalitions
- Industry can be divided into “coalitions”
- Each coalition is a group of firms adopting the same technical standard
A firm joining a coalition considers these factors:
- Size of the extra benefit to potential customers created by the firm joining the coalition
- Size of the coalition
- Degree of competition within the coalition
- Costs of achieving compatibility relative to the increase in profits
Lock-In
- A tendency of customers to persist with the use of a particular product as a result of switching costs
- Decisions made at one point in time can restrict the options available in the future
- Indicates that “history matters” and is related to the term “path dependence”
Examples:
- Collection of LPs makes it expensive to switch to MP3 players
- Investment in human capital built up through experience with a particular software package, requiring retraining if a new package is adopted