managerial economics beeg 5013 assignment 1 : how best to allocate firm availability resources mba...

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Managerial Economics BEEG 5013

Assignment 1 : How Best to Allocate Firm Availability Resources MBA UUM ATC Cohort 10

MUHAMMAD IDZAM BIN JAAFAR – 813929MOHD SHAMSURI BIN MOHD GHAZALLI – 813928

ForLt Kol Prof Dr Abdul Razak Chik

[email protected]

UNIVERSITI UTARA MALAYSIA (UUM)ATC SHAH ALAMMASTER OF BUSINESS ADMINISTRATION (MBA)

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Meeting Agenda

•Introduction to Problem Statement•Our Business Aim•Our Possible Consideration•Our Solution•Conclusion

MBA UUM ATC Cohort 10 – 813929 & 813928

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Problem Statement

How Best to Allocate Firm Availability Resources as such:

•How much commodity or service to produce?

•How much labor?•How much capital?•How much inputs to use to produce that

output efficiently?


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Problem Statement

Example:

•A police department may seek to solve crime as many as possible (output) at an adequate security standard with its limited physical resources (input) (police officers, police car, intelligent equipments and prison) and budget at the lowest possible cost (economic).


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Our Business Aim

•Maximize wealth and value of the firm•Maximize total profits, sales and growth


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Our Possible Consideration

Profit Maximization•Profits Maximize when marginal revenue

(MR) equals marginal cost (MC). •MR = MC•As long as the revenue of expanding

output or sales exceeds the marginal cost, it pays for the firm to expand output


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Constraint Optimization•If there are constraint such as customer

services, product quality, manpower planning, outsourcing and contracting, acquiring new technologies or political lobbying,

•Pursue each activity until the marginal revenue (MR) from the activity is zero.

•MR = 0 or output constantly not changing


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Demand Estimation• if the demand for the firm’s product is

forecast to grow but to be unstable, the firm might need to build a larger plant to meet the growing demand but might also have to carry larger inventories because of volatility of demand, as well as increase the promotional marketing team to make demand less volatile, acquiring new technology to expand the uses of the product

• Estimation could be done using Regression


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Future Economic Forecast•to reduce the risk or uncertainty that the

firm faces in its short-term operational decision making and in planning for its long term growth need

•Use time series analysis on trend projection to forecast raw material, equipment, warehousing, workers and all required resources to perform the output


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Efficient Production • how much labor or resources should the

firm use in order to maximize profits?• Optimal use of labor, firm to hire more

labor as long as the marginal revenue product of labor (MRP)L exceeds the marginal resource cost of hiring labor (MRC)L, and until MRPL = MRCL.

• By hiring more labor, the firm would increase its total profits


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Our Possible ConsiderationCost Estimation

• Production cost = Implicit cost + Explicit Cost• Explicit cost - actual expenditures of the firm to

hire, rent or purchase the inputs it requires in production that include wages to hire labor, the rental price of capital, equipment and buildings, and the purchase price of raw materials and semi finished products

• Implicit cost - value of the inputs owned and used by the firm in its own production activity (opportunity cost)


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Plant Size and Economies of Scale•economies of scale arise because of the

scale of operation increases, a greater division of labor and specialization can take place and more specialized and productive machinery can be used.

•With bulk purchases, larger firms receive quantity discounts in purchasing raw materials and other intermediate inputs than smaller firms.


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Market Structure and Degree of Competition

• Aware on the competitive environment in which of its buyers and sellers operate

• Resource allocation based on market structure such as:

perfect competition at one extremepure monopoly at the opposite extrememonopolistic competition and oligopoly in

between


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Our SolutionResources Allocatively Efficient in Perfect Competition – Thinking at the Margin

• How much to produce or what price to charge?

• Market will be allocatively efficient as long as the firms in that market produce at the P (profit)= MC (marginal cost) level of output.

• More resources will be allocated towards the production of the product until the marginal cost and the price are equal


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Our Solution

Resources Allocatively Efficient in Perfect Competition

• P= MC point firms maximize their profits and resources are said to be efficiently allocated.


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Our Solution


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Our SolutionResources Allocatively Efficient in Perfect Competition

• Case study: • For a competitive firm, the price it receives does

not depend on the quantity it chooses to sell. Marginal revenue equals the price of its output.

• If the price is $6, then the total revenue of selling 10 units is $60 and the total revenue of selling 11 units is $66. Marginal revenue, ªTR/ªQ = (66-60)/(11-10) = $6.


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Our Solution

Resources Allocatively Efficient in Perfect Competition

~continue• Both revenue and cost considerations determine the profit

maximizing output choice, but which of the cost functions is relevant?

• The profit maximizing output choice involves “thinking at the margin.”

• Based on sample data,


When output is

Margin Cost Profit

< 4 $6 Increased

4 Marginal Revenue

No change in profit

> 4 > Marginal Revenue

Lower

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Our SolutionWhen to Shut Down or Produce 0

• In the short run, a firm should shut down when price less than average cost, P < min (AVC).

• It is impossible for revenues per unit to be as high as variable cost per unit so it is better to avoid these variable costs

• If we can find a Q where P > AVC, then producing Q is better than 0. If P < min(AVC) then it is impossible to do better than shutting down


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Our SolutionOperating business in perfect competition

• Being allocative efficiency where in both the short and long run price is equal to marginal cost (P=MC

• At the ruling market price, consumer and producer surplus are maximized.

• Normal profit means consumers are getting the lowest price, leads to greater equality in society.

• Firm also attained productive efficiency where this occurs when the equilibrium output is produced with average cost at a minimum.


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Our SolutionOperating business in perfect competition

• Firm is also being dynamic efficiency, produces homogeneous products so little scope for innovation to make products differentiated from each other and thereby allow a supplier to develop and then exploit a competitive advantage in the market to establish some monopoly power.

• Resources will not be wasted through advertising because products are homogenous.

• Competitive advantage for a firm as it is X-efficient because it incurs no unnecessary costs of production.


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Our Conclusion

Operating business in perfect competition

It is the best way to allocate availability resources for our business to achieve profit maximization, cost minimization, allocative efficiency, economies of scale and optimum firm supply decision


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Thank You


managerial economics beeg 5013 assignment 1 : how best to allocate firm availability resources mba...

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