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8/6/2019 ME Ppt Final

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Long Term Production Analysis

Class Presentation by Group 2, Section A


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Agenda

Case on Gasoline Consumption2

Managerial Challenge : Electricity Units3

Fords One Billion write off4

Conclusion54

Long Run Production Analysis1


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Long Run Analysis

Two Runs: Short and Long : The first step in the analysis oflong-run production is a distinction between the short run and thelong run.

Short Run: The short run is a period of time in which at least oneinput used for production and under the control of the producer isvariable and at least one input is fixed.

Long Run: The long run is a period of time in which at all inputsused for production and under the control of the producer arevariable.

The difference between short run and long run dependson the particular production activity. For some producers,the short run lasts a few days. For others, the short runcan last for decades.

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Long Run Analysis

LONG-RUN PRODUCTION ANALYSIS:An analysis of the production decision made

by a firm in the long run. The central

characteristic of long-run production analysisis that all inputs under the control of the firmare variable. The central principle guidingproduction in the long run is returns to scale,

which indicates how production responds toproportional changes in all inputs. Acontrasting analysis is short-run productionanalysis.



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Long Run Analysis

The analysis of long-run production indicateshow a business pursues the production ofoutput given that all inputs under its control isvariable. In particular, a firm is able to alter

not only the quantity of labour and materials,but also the amount of capital. In the long run,a firm is not constrained by a given factory,building, or plant size.



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Long Run Analysis

Long-run production analysis extends andaugments short-run production analysiscommonly used to explain the law of supply.The critical difference between the long run

and the short run is the law of diminishingmarginal returns. This law applies to the shortrun, which has at least one fixed input, but notthe long run, which has all inputs variable.



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Long Run Analysis

The guiding principle for the long run isreturns to scale, which indicates howproduction changes due to proportionalchanges in all inputs. Returns to scale can be

either increasing, decreasing, or constant.



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Long Run Analysis

RETURNS TO SCALE The key principle guiding long-run production is

returns to scale:Returns to scale are the changes in production thatresults when all resources are change proportionally in

the long run. Firms typically operate in one of three returns to

scale alternatives:

Constant returns to scale

Increasing returns to scale

Decreasing returns to scale



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Long Run Analysis

Constant Returns to Scale

This occurs if a proportional increase in all

inputs under the control of a firm results in anequal proportional increase in production.

In other words, a 10 percent increase in labour,

capital, and other inputs, also results in an equal10 percent increase in production.



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Constant Returns of Scale


CAPITAL

LABOUR

200Q

100Q

B

A

6

6

3

3

0


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Long Run Analysis

Increasing Returns to Scale


inputs under the control of a firm results in agreater than proportional increase in production.


capital, and other inputs, results in a productionincrease that is greater than 10 percent.



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Increasing Returns of Scale

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CAPITAL

LABOUR

300Q

100Q

C

A

6

6

3

3

0


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Long Run Analysis

Decreasing Returns to Scale


inputs under the control of a firm results in a lessthan proportional increase in production.


capital, and other inputs, results in a productionincrease that is less than 10 percent.



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Decreasing Returns of Scale

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CAPITAL

LABOUR

150Q

100Q

D

A

6

6

3

3

0


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Long Run Analysis

Returns to scale sheds a little long-run production analysis lighton the positive law of supply relation between price and quantity.In the short run, the law of diminishing marginal returns indicatesthat a higher production cost, and thus a higher price,corresponds with greater production, which is the law of supply.

However, in the long run, because returns to scale can increase,decrease, or remain constant, production cost can also increase,decrease, or remain constant, which further means price can

increase, decrease, or remain constant. As such, there is noreason to expect that the law of supply correspondence betweena higher price and a larger quantity holds in the long run.



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Case 1


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Case 1

Cost Of Time

As per the caseThe cost of time

is $4/hr

Cost AssociatedWith Time

Cost OfFuel

As per the caseThe cost of time

is $2/gallon


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Case 1

As per the case we have three scenarios:

1. If the person drives at an speed of 50 mi/hr2. If the person drives at 60 mi/hr

3. If the person drives at 72 mi/hr

In all these cases we need to analyse and concludethat what should be the optimal speed of the journey in

case the person want to optimise the time value andearnings.


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Case 1 Cont

If the person drives at an speed of 50 mi/hr::

Total journey time = 7.2 hrs Gasoline consumption = 36 gallons/mile

Based on the above data the total cost of journey wouldbe:

7.2X4 + 10X2 = $ 48.8


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Case 1 cont

The Same be represented on the graph as follows:

7.2

6

5

10 12 15


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Case 1 Cont


Total journey time = 6 hrs Gasoline consumption = 30 miles/gallon


6X4 + 12X2 = $ 48


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Case 1 Cont


A7.2

6

5

10 12 15

B


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Case 1 Cont


Total journey time = 5 hrs Gasoline consumption = 24 mile/gallons


5X4 + 15X2 = $ 50


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Case 1 Cont


A7.2

6

5

10 12 15

B

C


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Case 1 - Conclusion

Conclusion:1. At the cost of time at $4 and gasoline cost at $2 theOptimal solution is found to be at point B, where inthe total cost of the journey comes out to be $48 only,which is the lowest

2. In case the prices of gasoline come down to $1 thetotal cost of journey will become optimal at point Cand that would be only $35.

3. This was a step towards setting up long term energyefficiency systems but lowered oil prices between1986 2003, halted all such attempts.


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Case 2

Power plant were under scope due to:

Intense regulation of its prices.

Service standards. Choice of production technology used.



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Case 2

Case Overview: Power plants in 70s and 80s went for

assumptions of ECONOMIES OF SCALE.

The belief was that larger plant producedpower at low cost.

In some cases, final costs exceeded the initialestimates.

Expensive Capital Equipment for ExpensiveRaw Material like Nuclear and Coal wereused.



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Case 2



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Case 2

ECONOMIES OF SCALE AT STAKE!!

Emergence of independent power producers.

They built small, less capital intensive powerplant which used cheap raw material such asnatural gas.

Sold power to Utility companies or directly tothe end user.



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Case 2

These independent power producing housesunderstood that substantial cost savings canbe achieved by:

Understanding the relation between input andoutput of production process.

Substituting for cheap variable input. I.e.Natural Gas.

Analyse the trade-off between the CapitalCost and Variable Cost



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Case 2

In the Long term, the Firm has to:

Increase operating efficiency

Lower costs

Maximize Shareholders Wealth.



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Case Let 3

FORDS

$1 BILLION

WRIT

E-OFFwww.themegallery.com


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Case 3 - Introduction

Palladium, a precious metal, used as aninput in the production of catalyticconverters which helped in reducing

pollutants from exhaust.Prices of Palladium increased from $80

per ounce in 1992 to $750 per ounce in2000, per ounce.



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Case 3 Cont

On the other hand, in 2002, the engineers atFord were successful in devising methods ofsubstituting Palladium in the production ofcatalytic converters.

This substitution resulted in the use ofPalladium to be cut into half, starting 2003.

Hence, the demand for Palladium decreased

and its prices quickly fell below $300 perounce, leaving Ford with a stockpile ofPalladium it did not require and which wasworth a fraction of its acquisition cost.



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Case 3 - Conclusion

Hence, due to miscommunication orcommunication gap between the Fordsengineers and managers, the company

had to write-off the stockpile of Palladiumworth $1 Billion.



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