BEC 30325: MANAGERIAL ECONOMICS Session 06 DEMAND FORECASTING (PART II) Dr. Sumudu Perera
Session Outline 2 Smoothing Techniques- Example- Moving Average Limitations of Qualitative Demand Forecasting Limitations of Quantitative Demand Forecasting Dr.Sumudu Perera 19/10/2017
Example- Moving Average 3 The following table shows the actual sales of shoes of Boots Inc. from February 2016 to August 2016 a) Compute 3 month moving average forecasts b) Compute 5 month moving average forecasts Time (t) Month Sales (1000) 1 Feb 19 2 Mar 18 3 Apr 15 4 May 20 5 Jun 18 6 Jul 22 7 Aug 20 Dr.Sumudu Perera 19/10/2017
Limitations of Qualitative Forecasting Techniques 4 Provides estimates that are dependent on the market skills of experts and their experience. These skills differ from individual to individual. Involves subjective judgment of the assessor, which may lead to over or under-estimation. Depends on data provided by sales representatives who may have inadequate information about the market. Ignores factors, such as change in Gross National Product, availability of credit, and future prospects of the industry, which may prove helpful in demand forecasting. Dr.Sumudu Perera Most of the qualitative methods are expensive 19/10/2017
Limitations of Quantitative Forecasting Techniques 5 There are many assumptions used in these statistical and mathematical models Assumes that the past rate of changes in variables will remain same in future too, which is not applicable in the practical situations. Some techniques are quite complicated, managers may not be able to easily understand Dr.Sumudu Perera 19/10/2017
BEC 30325: MANAGERIAL ECONOMICS Session 07 APPLICATION OF THEORY OF PRODUCTION AND COST ANALYSIS (PART I) Dr. Sumudu Perera
Session Outline 7 Introduction The Production Function with one variable input Optimal usage of the variable input The production with two variable inputs Optimal combination of two inputs Dr.Sumudu Perera 19/10/2017
Theory of Production Production - a process through which factor inputs are made into output that directly or indirectly satisfy consumer demand PRODUCTION SHORT RUN: AT LEAST ONE FIXED FACTOR & GIVEN TECHNOLOGY LONG RUN: ALL FACTOR INPUTS VARIABLE BUT NOT technology VERY LONG RUN: ALL FACTOR INPUTS AS WELL AS TECHNOLOGY VARY
Short run: Production with one variable input. Q f ( K, L) maximum rate output obtainable from a given combination of fixed capital and labour input Total Product Marginal Product Average Product Production or Output Elasticity TP, Q = f(l) MP L = TP L AP L = TP L E L = MP L AP L
Output elasticity It represents the change in the quantity produced as the change in with respect to the inputs E o = % change in output (ΔQ%) % change in inputs (ΔX%) = ΔQ x X ΔX Q or Decision criteria: when E o > 1 it reflects an increasing returns to scale, where E o < 1 it reflects a decreasing returns to scale and E o = 1 constant returns to scale.
Production Function with One Variable Input L Q MPL APL EL 0 0 1 3 2 8 3 12 4 14 5 14
Short Run Production Function
Short Run: Optimal Use of the Variable Input Marginal Revenue Product of Labor Marginal Resource Cost of Labor Optimal Use of Labor MRP L = (MP L )(MR) MRC L = TC L MRP L = MRC L
Optimal Use of the Variable Input
Optimal Use of the Variable Input Use of Labor is Optimal When L = 3.50 L MP L MR = P MRP L MRC L 2.50 4 $10 $40 $20 3.00 3 10 30 20 3.50 2 10 20 20 4.00 1 10 10 20 4.50 0 10 0 20
Exercise : Optimal Variable Input Use Labour Units Total Product Marginal Product Marginal Revenue Prodcut Marginal Resource Cost Fill in the blanks. 0 0 1 5 2 15 3 45 4 55 5 60 6 68 7 55 Assume that the price of the product is Rs. 12 and wage cost is Rs. 360
Long run: Production with Two variable inputs 17 Q f ( K, L) Maximum rate output obtainable from a given combination of capital and labour input which are variable A firm faces with the problem of efficient allocation of resource in production, i.e., produce output that maximizes profits. Isoquants and Isocost Dr.Sumudu Perera 19/10/2017
Long Run: Production With Two Variable Inputs Firms will only use combinations of two inputs that are in the economic region of production, which is defined by the portion of each iso-quant that is negatively sloped.
Production Function with two inputs Q = f(l, K) K Q 6 10 24 31 36 40 39 5 12 28 36 40 42 40 4 12 28 36 40 40 36 3 10 23 33 36 36 33 2 7 18 28 30 30 28 1 3 8 12 14 14 12 1 2 3 4 5 6 L
Production with two variable Inputs Isoquants Isocost Ridge lines MRTS and long run equilibrium Production expansion path
Production with two variable inputs Marginal Rate of Technical Substitution MRTS = -K/L = MP L /MP K
Production With Two Variable Inputs
Substitute and Complementary inputs Perfect Substitutes Perfect Complements