International Journal of Research and Innovation in Social Science (IJRISS) | Volume IV, Issue IX, September 2020 | ISSN 2454–6186

Managerial Economics and Production Functions – Theoretical Review and Practical Applications

 Kwesi Atta Sakyi
Head of Research, ZCAS University, Lusaka, Zambia

Abstract: The objective of this paper is to review the important economic concept of production functions with regard to how they influence business decisions both in the short and long run, and also show how practically they determine how firms compete to make profit. This paper is a short review of an important economic concept so the approach adopted as methodology was that of a qualitative approach based on relying on secondary data. It is hoped that the paper will stimulate further reading and research by researchers and students alike.

Keywords: production function, short run, long run, economies of scale, economies of scope, diminishing returns, fixed costs, variable costs, profit maximization, relevant costs, irrelevant costs

I. INTRODUCTION

Relevant and Irrelevant Costs

According to Study.com (n.d.), an online source, Relevant Cost is cost which is influenced positively or negatively by a management decision, and such costs change in the future. For example, if there are five copy-typists for an organisation, who operate from a typing pool, and management decides that going forward, all managers should learn computer skills and do all their documents themselves, then in the near future, the services of the copy-typists would be dispensed with leading to savings in salaries. This is an example of relevant cost.

On the other hand, Irrelevant Cost is cost which remains the same such as contractual overheads or sunk costs such as interest on loans, rentals, among others. Irrelevant costs are therefore Fixed Costs.

II. LITERATURE REVIEW

Firm Short run Production Function and Short run Cost (MP&MC)

According to Keat et al. (2013) the firm’s short run production function is with assumptions of fixed technology and capital, and it is the maximum output which results from a combination of factor inputs with at least one factor fixed in the short run. Here, raw materials and labour can be variable input while capital and land can be the fixed inputs whose acquisition takes time to organise or negotiate for.

According to Lipsey & Chrystal (2010: 109) the long run and short run are derived from the same production function with the short run Cobb-Douglas production function being Q = A