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Managerial Economics: MBAFT 6103

The document discusses four topics: economies of scope, learning curves, sales maximization versus profit maximization. It defines economies of scope as the cost savings when two goods are produced jointly by a single firm. It presents the learning curve concept that average production costs decrease with cumulative output. The document also notes that large firms may choose to maximize total revenue instead of profits, resulting in higher output but lower profits.

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Siddharth Verma
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38 views13 pages

Managerial Economics: MBAFT 6103

The document discusses four topics: economies of scope, learning curves, sales maximization versus profit maximization. It defines economies of scope as the cost savings when two goods are produced jointly by a single firm. It presents the learning curve concept that average production costs decrease with cumulative output. The document also notes that large firms may choose to maximize total revenue instead of profits, resulting in higher output but lower profits.

Uploaded by

Siddharth Verma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Managerial  

Economics
MBAFT 6103

1
Today
Four Special Topics
•  Economies of Scope
•  Learning Curve
•  Sales Maximization versus Profit Maximization

2
Economies  of  Scope

If the total cost of producing two goods X and Y by a
single firm is less that the cost of producing X and Y
separately, then the production of X and Y is
characterized by economies of scope

i.e., economies of scope exists if


TC(X,Y) < TC(X) + TC(Y),
Where TC(X,Y) is the total cost of jointly producing X
and Y.

3
Economies  of  Scope

Measured by the ratio

(TC(X) + TC(Y) – T(X,Y))/(TC(X) + TC(Y))

4
Economies  of  Scope

Measured by the ratio

(TC(X) + TC(Y) – T(X,Y))/(TC(X) + TC(Y))

Examples?

5
Economies  of  Scope

Arises because of complementarity

6
Learning  Curve

Learning curve for a business tells us about the
relationship that exists between average cost of
production and the cumulative quantity produced by
that business.
Learning  Curve

Average  Cost

Cumulative  Output
Learning  Curve

•  Can also be expressed as man-hour per unit of
production as a function of cumulative output
yx = ax-b
B where

x = cumulative production
yx = man-hrs. to produce xth unit
a = hrs. to produce first unit
b = a parameter related to the percentage
associated with the Learning Curve
Learning  Curve

Why do we observe this?


Learning  Curve

•  Innovation and improvements in operations

•  Standardization

•  Product Re-design

•  Increased labor efficiency

•  Learning from shared experience

Read both topics from Salvatore.


Sales  Maximization

•  Baumol’s model
•  Applicable for big firms
•  Maximize total revenue instead of total profit

12
Sales  Maximization

•  Sometimes large firms do sales (revenue)
maximization instead of profit maximization
•  Outcome? Sales maximization means more output
and higher revenue.
•  Example: P = 10 – 0.1Q. TC = 70 + 2Q
Profit maximization gives, Q =40, P=6, π = 90
Revenue max gives, Q =50, P=5, π = 80
•  Why do Sales Maximization instead of profit
maximization?

13

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