Page 97 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes

Task Consider any one manufacturing company and note down its production
in units for the last 5 years. Also try to find out what inputs do they use in their production.

6.3 Production Function with two Variable Inputs

A firm may increase its output by using more of two variable inputs that are substitutes for each
other, e.g., labour and capital. There may be various technical possibilities of producing a given
output by using different factor combinations. Which particular factor combination will be
actually selected by the firm depends both on the technical possibilities of factor substitution as
well as on the prices of the factors of production.
The technical possibilities of producing an output level by various combinations of the two
factors can be graphically represented in terms of Isoquants (dealt with in this chapter later).

Caselet Real World — Advantages of Just-in-time Production
uring the 1950s and 1960s, the Toyota Motor Company originated and developed
the just-in-time system of production which has had an enormous effect in
DJapan and elsewhere. According to this system, materials, parts and components
are produced and delivered just before they are needed. One advantage is that inventories
of parts and of work in process are reduced considerably, but this is only part of the story.
In addition, the time and cost required to change from the production of one part or model
to another are reduced, thus cutting costs and enabling the firm to produce small lots
economically.

A careful comparison of an automobile plant using the just-in-time system with an
automobile plant not using it resulted in the following data:

Plant using just-in-time Plant not using just-in-time
System System
Cars produced per day 1,000 860
Total factory workers 1,000 2,150
Workers per car per day
Direct labour 0.79 1.25
Overhead personnel 0.21 1.25
Total 1.00 2.50

The above data reveals the following:
1. Yes – the number of cars produced per day divided by the number of workers is 1.0
in the plant using the just-in-time system but only 0.4 in the plant not using the just-
in-time system.
2. The average product of labour – the number of cars produced per day divided by the
number of workers – is the reciprocal of the number of workers per car per day.
Thus, the average product of overhead workers is 1/0.21 = 4.76 using the just-in-
time system, but 1/1.25 = 0.8 without it. On the other hand, the average product of
workers engaged in direct labour is 1/0.79 = 1.27 using the just-in-time system, but
1/1.25 = 0.8 without it. Clearly the percentage increase in average product is greater
for overhead workers than for direct labour.
Contd...

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