eco (delhi10)

63
THEORY OF PRODUCTION Production theory deals with physical relationship i.e. technical & Technological relations between input & between Output & inputs. PRODUCTION Means a process by which a commodity or commodities are transformed into a different usable commodity. INPUT OUTPUT (Called manufacturing) Services like transport, legal, medical consultancy, storage for future use, wholesaling, retailing are also productive activities. INPUT & OUTPUT INPUT Inputs are of two types 1. Fixed 2. Variable 1. Fixed whose supply is inelastic in short run. All its users can’t employ more of it in short run. E.g. plant, machinery, building. 2. Variable factors Whose supply in short run is elastic e.g. labour & raw material OUTPUT Goods & services that comes out of production process. SHORT RUN & LONG RUN SHORT RUN Supply of certain inputs is fixed production can be increased by increase in use of variable inputs. LONG RUN Supply of all inputs is elastic but not enough to permit a change in technology. PRODUCTION FUNCTION Production function is a tool of analysis used to explain the relationship between input & output. It describes the technological relationship between input & output. It tells that production depends on certain ships. It can be in the form of specific inputs. Schedule Table Graphed line Curve An algebra aqua Mathematical model

Upload: nischay

Post on 28-Mar-2015

9.780 views

Category:

Documents


3 download

TRANSCRIPT

Page 1: eco (Delhi10)

THEORY OF PRODUCTIONProduction theory deals with physical relationship i.e. technical & Technological relations between input & between Output & inputs.PRODUCTION Means a process by which a commodity or commodities are transformed into a different usable commodity.

INPUT OUTPUT (Called manufacturing)Services like transport, legal, medical consultancy, storage for future use, wholesaling, retailing are also productive activities.

INPUT & OUTPUTINPUT Inputs are of two types

1. Fixed2. Variable1. Fixed whose supply is inelastic in short run. All its users can’t employ more of it in

short run. E.g. plant, machinery, building. 2. Variable factors Whose supply in short run is elastic e.g. labour & raw material

OUTPUT Goods & services that comes out of production process.SHORT RUN & LONG RUNSHORT RUN Supply of certain inputs is fixed production can be increased by increase in use of variable inputs.LONG RUN Supply of all inputs is elastic but not enough to permit a change in technology.

PRODUCTION FUNCTIONProduction function is a tool of analysis used to explain the relationship between input & output. It describes the technological relationship between input & output.It tells that production depends on certain ships. It can be in the form of specific inputs.

Schedule Table Graphed line Curve An algebra aqua Mathematical model

Classification of input by economist Land Labor Capital Raw material Time Space

E.g. a = f (K, L)K = CapitalL = Labor

Assumptions (i) Perfect divisibility of both inputs & outputs.(ii) Limited substitution of one factor for the other.(iii) Constrict technology

Page 2: eco (Delhi10)

(iv) Inelastic supply of fixed factors in the short-term.

Laws of Production

Laws of variable proportions laws of returns to scale (long-run)

Law of Returns to variable proportions of fixed factors

Law of Diminishing Returns (or variable proportion) Relationship between varying factor proportions & output when more & more units of a variable input are applied to a given quantity of fixed inputs the total output may initially increase at an increasing rate & then at a constant rate but it will eventually increase at diminishing rates. I.e. the marginal increase in the total output eventually decreases when additional units of variable factors are applied to a given quantity.

Here we take K (capital) as constant & Labor (L) as variableQ = f (L)

MPL= TPN – TPN-1(first derivative of the Production Function)

Total OutputTP(Total Production)

Labour

Marginal & Average Prod.

APL

Labour MPL

In stage IThe first increases MPL also increase TPL continues to increase but at diminishing rate.

Page 3: eco (Delhi10)

In stage III.e. after 5th worker. TPL is max at the employment of 10th worker beyond this level of output TPL

decreases in stage III.Factors Behind the Laws of ReturnsStage I – Law of increasing returns is an operation.Stage II – Law of diminishing returns is in application.

FactorsIndivisibility of fixed factor (capital)- (Results in under utilization of capital of labor are less than its optimum number). If less than 6 workers is underutilizing of K.- (Increase in labor productivity is that employment of additional workers leads to advantages of division of labor until optimum capital labor combination is reached because of specialization of labor)

Once optimum capital labor rate is reached employment of additional workers will amount to substitution of capital with labor. But there is a limit to which one input can be substituted for another i.e. elasticity of substitution between input is not in fete. Also difficult to assign specialized task & return of firm must operateAssumptions excessive

- Technology remains unchanged - Input prices.- Variable factors are homogenous

Application of the Law of Diminishing Returns. Empirical Law is not applied universally Technology remains fixed effect of an additional input when technology changes can’t be

explained. Is all input are increase in all input How much to produce What no. Of workers to apply to a given fixed input.

Marginal Revenue Productivity & Labor EmploymentEquip-marginal Principal – Marginal revenue productivity of labor equals the marginal wags rate.The marginal revenue productivity is the value of product resulting from the marginal unit of variable input (labor).MRP = MPP x P(Marginal revenue Product) (Marginal Physical Productivity) x (Price)When MRP = wage rate tells the no. of labor to be employed.Profit is max when MR = MC

P1 P AW=MW W

MRP & MW

N MRP

Page 4: eco (Delhi10)

At point P, the no. of worker = ON should be employed.

Total output = ON x APC (Average Labor Productivity)

Long Term Laws of ProductionIn the long-run supply of both. The input is supposed to be elastic & firms can hire. Larger quantities of both labor & capital.Laws of returns to scale are explained through production function & curves.

Iso-quant curve (Greek word)Equal quantity also known as “Equal product curve” or “Production indifference curve”.

An asquint curve is focus of points representing various combinations of two inputs – capital & labor yielding the same output.

Indifference curve Iso-quant2 consumer good 2 reducer goods Measures utility measures output.

Ok4 + OL1 = 100K4 A Ok3 + OL2 = 100

K3 B

K2 C

K1 DIQ2

EIQ1=100

L1 L2 L3 L4

Substitution of one factor for other leaves the unaffected. I.e. substitution of labor for capital such that all quantity of commodityi.e. IQ = 100

Properties of Iso-quant- Negative slope in the economic region (region in which substitution between

inputs is technology possible). It indicates substitution is possible i.e. if one is ↓ the other has to be ↑ to keep output.

- Convex to origin – implies not only the substitution between the inputs but also that marginal rate of technical substitution (MRTS ) is the economic region.MRTS = ΔK = Slope of iso-quant.

ΔL

Page 5: eco (Delhi10)

The rate of which marginal unite of labor can substitute margin. Unit of capitalMRTS ↓ : No factor is perfect substitute for another.

ΔK1 > ΔK2 > ΔK3

ΔL1 ΔL2 ΔL3

If ΔK1 = ΔK2 = ΔK3 but ΔL1 = ΔL2 = ΔL3

- Can’t intersect or be tangent to each other – intersection means that a given quantity of a commodity can be produced with a smaller as well as a larger input-combination, which is not possible until Marginal productive greater than Zero.

- Upper iso-quant Represent higher level of output

Laws of Returns to scale

(i) Increasing Returns to Scales – Proportionate change in both the inputs K & L leads to more than. Proportionate change in output. I.e. if K & L are successively double the corresponding output is more than doubled.

BProduction Line

3KC

2K

1K Q 40

Q25 Q10

1L 2L 3L

Reasons Technical & managerial indivisibility

- Higher degree of specialization composite Technology for higher forms division Own transport & strong facility of Labor.

- Dimensional relation – 15 x 10 = 150 30 x 20 = 600

(ii) Constant Returns to scale- when the change in output is proportional to the change in inputs K & L are doubled is also doubled.1K + 1L = 10 ] DOUBLE 2K + 2L = 20 50% increase in K & L to3K + 3L = 30 50% increase in Q

Page 6: eco (Delhi10)

AProduction Line

3KB

2K

1K Q 30

Q20 Q10

1L 2L 3L

Reason – limits of the economics of scale.When economies of scale reach their limits & diseconomies are yet to begin.

- Where factors of production are perfectly divisible - Technology is such that capital Labor ratio is fixed.- Production fine is homogenous of degree

Decreasing Returns to ScaleProportionate change in input (K & L) leads to a less proportional change in output.1K + 1L = 102K + 2L = 18 50% increase (K & L) or increase 33.3%3K + 3L = 24

BProduction Line

3KC

2K

1K Q 24

Q18 Q 0

1L 2L 3L

Reasons Diseconomies of scale Diminishing returns to management i.e. managerial diseconomies Limitedness or exhaustibility of natural resources as by increasing six of

coalmine it is not necessary that coal deposits also increases.

Page 7: eco (Delhi10)

Production Function

Qx = P (K, L)When all the inputs are increased in the same proportion & the proportion can be factored out then prod fune is called homogenous prod function of degree or linear prod function.

KQx = f (kK, kL)= k (K, L)

Prod fune of degree I implies const. Return to scaleHQn = f (kK, kL)If h = K Const. Returns to scale.If h > K increasing Returns to scale.If h < K decreasing Returns to scale.If Qn = 5K + 10L

Qn1 = 5 (1) + K (2)25 = 5 + 20

(K = 2, L=4) If Qn2 = 5 (1 x 2) + 10 (2x2)

58 = 10 + 40Qn2 = 50 = 2 h=2Qn1 25K = h const return, h>K increasing, h<K decreasing

Degree of production function & returned to scale

K = k’ exponent is in case of prod. Fune of degree 1.But prod. Funct. can be have exponent quarter or less than 1.Let exponent k is R where R = 1 F (RK, RL) = Rr (K, L) = Rr (Q)

If R>1 & r<1 decreasing returnsIf R>1 & r>1 increasing returnsIf R>1 & r=1 constant returns

Q =K0.25 L 0.50

HQ = (Rk)0.25 (Rl)0.50

HQ = R0.25+0.50 [K 0.25 L 0.50]HQ = K0.75 (K0.25, L0.50)H =K0.75 R = 0.75 < 1 decreasing Returns

Q = K 0.75 L 1.25 0.50

HQ= (RK)0.75 (RL)1.25 (RX)0.50

HQ = R 0.75+1.25+0.50 (K 0.75 L 1.25 0.50) = R 2.5 (K 0.75 L1.25 0.50)

H = K 2.5 R = 2.5 > 1 increasing returns

Page 8: eco (Delhi10)

If h = K R=1 Constant Return

Economies of Scale

Internal External

Internal Economies - Economies in production (i) Technology advantage (ii) advantages of division of labor & specialization.- Economies in marketing (sales force better utilization)

Large scale purchase raw materials Distribution through whole sealers Low cost sales persons Advertising low cost

- Managerial economies Specialization in management Mechanization of managerial fune. Decentralization of decisions making Advanced technology of communication.

- Economies in transport & storage Own means of transport prevents delay Create their own god owns less storage cost.

External Economies- Large-scale of purchase of raw material.- Acquisition of finance at less contest rate.- Lower advt. Rates charged for large-scale advertising.- Concessional rates by transport companies.- Lower wage-rates if mono Portia employees

Optimal input combination

OK3 + OL1 = 100 OK2 + OL2 = 100 OK1 + OL3 = 1Technically any point can be chosen but not economically.Only one combination gives the min-cost that point or combination is chosen Let total costC = KPk + LPl

C-LPL = LPL

K = C - PL.LPK PK

L = C - PK.KPL PL

The line from alternative combination of K & L can be purchased out of total cost C is know as Iso-cost Is cost Isoclines or budget line or budget constraint line.

K3

Page 9: eco (Delhi10)

Ok1= C - PL . L (Where L=0)K2 PK PK

K1 OL1 = C - PK . K (Where K=0)

PL PL

∆k

∆L

L1 L2 L3-ΔK = slope of Iso cost represents ΔLMarginal rate of exchange (MRE)AsLeast cost factor criteria

- First order condition - Second order condition

-ΔK = MPL

ΔL MPK

ΔK = MREΔLMPL = Marginal Physical Productivities of L & K.MPK Least-cost input combinationInput combination at which factor exchange ratios of their marginal productivities.MPL = PL or MPL = MPK

MPK PK PL PK

MPL = slope of Iso-quantMPKLeast-cost combination exists at a point where Iso-quants are to the Iso-cost.-ΔK = MPL

ΔL MPK

First order at A & Q also is on upper Iso-quant Large firm will choose point P.

A

P

B Q=200

D Q=200

Least cost criterion in value terms.PL = MRPL or MRPL = MRPK

PK MRPK PL PK

Page 10: eco (Delhi10)

Effect of change in Input Price.It all input prices change in the same proportion the relative prices of inputs remain unaffected.Change in input combination result from the substitution effect of change in relative price of input. Cost minimizing firms substitution relative cheaper input for costlier one. This is known as substitution effect.As a result of change in P reduces K by K1 K2 && increases L1 L2. This is known as input price effect.Substitution effect = Price effect – budget effectPrice effect = L1 L2

Budget effect = L1 L2

Substitution effect = L1 L2 – L1 L2 = L2 L3

If price of an input ↓ level of output ↑ & vice-versa.Firm employs more of cheaper input & less of costlier one.

K’

KK3

K2 K1

L1 L2 L L3 L’ W

Cost & Output RelationShort-run cost – output relationsTotal Cost (TC) – Actual Cost that must be incurred to produce a given quantity of output.TC = TFC + TVC

(Total Fixed Cost) + (Total Variable Cost)For a given QAverage Cost AC = TC = TFC + TVC

Q QAverage Fixed Cost AFC = TFC

QAVC = TVC

QAC = AFC + AVC

Marginal cost (MC) = change in total cost divided by the change in total output.MC = ΔTC or δTC

ΔQ δQΔTC = ΔTFC + ΔTVCIn the short-run ΔTFC = O. ΔTC = ΔTFCIf ΔQ = 1 MC = ΔTVC

Cost function & cost output Relations

Page 11: eco (Delhi10)

Let the cost FunctionTC = a + bQ – CQ2 + dQ3A = fixed costB, c, d, = variable cost parameters.TFC remain fined for the whole range of output & hence takes the form of horizontal line TFC. The TVC curve shows that the total variable cost first increases at decreasing rate & then at an increasing rate. The slope of curve gives the rate of increase. The pattern of TVC is because law of increasing & dominating returns to the variable inputs.

TCTVC

Cost

TFC

OutputAverage Fixed CostAVC = TFC

QAFC curve is a rectangle hyper.Average variable cost (AVC)AVC = TVC

QCritical value of AVCThe critical value of Q (in respect of AVC) is that value of Q at which AVC is min. AVC is min when its (decreasing rate of change equals Zero.Q = δAVC = O.

δQQ = -0.9 + 0.10Q = 0 = 9Average Cost (AC)The average cost is defined as AC = TC

QAC = 10 + 6Q – 0.9Q2 = 0.05Q3

Q= 10 + 6 – 0.9Q + 0.05Q2 QAC curve is U-shaped

Critical value of Q in respect of AC is one at which AC is minimize.δAC = 10 – 0.9 + 0.10 = 0δQ Q2Q3 – 9Q2 – 100 = 0

Page 12: eco (Delhi10)

Q =10Critical value of output in respect of AC is 10 i.e. AC reaches its min. at Q = 10

ACCost

AVC

AFC

Output

Short Run Cost Curves Marginal cost (MC)MC = δTC

δQδTC = 6 – 1.8Q + 0.15Q2δQMC = TCM – TCn-1

Critical value of Q in respect of MC is 6 or 7.

Curve & the laws of diminishing returns,If more & more units of a variable input are applied to the given amount of a fined input the marginal cost initially decrease but eventually increases.Both AFC & AVC are declining because of internal economies.AC = AFC = AVC AC is also decliningIf operation of output AFC continues to fell AVC starts increasing because of fast increase in the TVC.Rate of fall in AC decreases. The AC reaches its min. when output increases to 10 units. Beyond this level AC Starts increasing which show that the law of diminishing returns comes in operation.Downward trued in the MC shows increasing marginal productivity of the variable input due mainly to internal economy resulting form increase in productive.Upward trend in MC shows increase in TVC & decreasing marginal productive of the variable inputs.

Important Cost Relationships- As long as AFC & AVC fall, AC also falls- When AFC falls but AVC increases change in AC depends on the rate of change

in AFC.

Page 13: eco (Delhi10)

If decrees in AFC > increase in AVC, AC↓If decrees in AFC = ↑ in AVC AC =If decrees in AFC < ↑ in AVC AC↑

- When MC is ↓ rate of fall in MC is > then that AC. MC is attributed to a single marginal unite while in case of AC. The decreasing MC is distributed over all the enter output.

- MC ↑ AC at a lower rate when MC ↑ it increase at a relatively lower rate which is sufficient only for reduce the rate of decrease to of AC & not sufficient to push the AC ↑. AC continues to ↓ even if MC ↑.

- MC intersects AC at its min point at this point AC is const AC = MCBreak-even AnalysisTR-TCPV Ratio = S-V x 100

SBEP (SALE VALUE) = Fixed expenses

Contribution per unitMargin of Safety = Profit x Sales

PV RatioMargin of safety = Profit

PV Ratio

Margin of safety = Sa-Sb x 100 Sa

(Represents the diff between the sales at break-even point & the total actual sales)Sa = Actual Sales Sb = Sales of BEP

Optimum output in short-runOptimum level of output is one, which can be produced at a minimum average cost, given the technology.The minimum level of AC is determined by the point of inter section between AC & MC curves.At this level output AC = MC. Production below or beyond this level will be in optional. It production is less than 10 it will leave some scope for reducing AC by producing more, because MC < AC. If production is > then AC can be reduces by reducing output.Optimum level of output is not occasional the max-profit output.

Long Run Cost – Output RelationsIn long run supply of all the inputs become elastic.Long run cost output relations therefore implies the relationship between the changing scale of the firm & the total output.Long run curves are composed of a service of short run cost curves.

Long Run Total Cost Curve (LTC)LTC can be draw through min points of STG, STG2 & STG3.

STC2 STC3 LTCSTC1

Page 14: eco (Delhi10)

Total Cost

O1 O2 O3

Long-Run Average Cost Curve (LAC)There is one AC associated with each “STC”.Firm has a service of SAC curves, each having a bottom point showing the min. SAC. For instance C, Q is the min AC when the firm has only one plant.AC ↓ to C2 Q2 when second point is added & then ↑ to C3Q3 after inclusion of third plant.LAC curve is also known as “Envelope curve” or “Planning Curve”. It serves as a guide to plan the expansion of production.

SAC1 SAC3Total Cost SAC2

LAC

O1 O2 O3With subsequent increase in the output LTC first↑ at a decreasing rate. Then at increasing rate. Asa result LAC initially decreases until optimum ultimately of second plant & then it begins to ↑.When the scale of firm expands unit cost of production initially ↓. But ultimately ↑The decrease in unit cost is attributers so the internal & external economies & ↑ to internal & external diseconomies.

Long-run marginal Cost Curve . If we draw from point A, B & C to the x-axis, the corresponding output levels will be QQ, QQ2, & QQ3. The AQ1 intersect the SMC BQ2, LMC is MQ. If output ↑ to OQ2, LMC ↑ BQ2. Similarly CQ3 measures the LMC at output OQ3. LMC must be equal to SMC for the output at which the corresponding SAC is tangent to the LAC. At the point of tangent LAC = SAC. For all other levels of output SAC>LAC. For all level of output corresponding to LAC = SAC LMC = SMC.For all other level of output LMC is either > or < then SMC.LMC intersects LAC. When LAC is at its minimum i.e. point B.

Page 15: eco (Delhi10)

There is one & only one short run plant sign whose min SAC coincides with the min LAC.SAC2 = SMC2 = LAC = LMC at point B.

Optimum plant size & long-run cost corves.Long-run cost curves helps in deciding the optimum size of the firm.Optimum size is on which ensure the most efficient utilization of resources.For a state of technology there is a using size of the firm & of output associated with the least lost concept.Optimum size consists of 2 plants, which produce OQ2 units of a product at min LAC of BQ2.The downtrend in LAC indicates that until output reaches the level of OQ, the firm is of non-optimal site.Technology should be such which gives min. LAC where SMC = LAC = LMC

SMC1 SMC2SAC1 LAC

SAC2Cost A B

C

Q1 Q2 Q3Output

Break Even Analysis

Break-even analysis or (profit contribution analysis) is an important analytical technique used to study the relationship between the total cost, total revenue, & total profits & losses over the whole range of stipulated output.It is the point where cost & revenue break even i.e. the profitable & non-profitable range of production or TR = TC.

BEP as linear cost & revenue functions

Let TFC = 100 & TVC = Rs.10/unitThan short run cost function.TC = 100 + 10Q& Let price of firm’s product = Rs.15 TR = 15Q.

TR

Page 16: eco (Delhi10)

PROFITTR>TC TC

BEPTR=TC

TVCCost / B

RevenueLOSS

TC>TRTFC

Quantity

ΔQ = 1 ΔVC 10TC is vertical summation of TFC & TVC. TR intersects the TC at point B where Q = 20 at this point TC breaks even with TR.Breakeven outputTR = TC15Q = 100 + 10QQ = 20Limitations – In real life cost & revenue fune are not linear; there can’t be single point as BEP. In reality functions may be non-linear. So that (To May increase at an increasing rate while the (TR) increases at decreasing rate.There can be 2 BEPS, which determine the upper & lower limits of profitable output.

Non-liner Cost & Revenue functions

TC B2 TR TR=TC

TR-TC =PROFIT

TFCF TC-TFC=TVC

Q1 Q3 Q2At B1 & B2 TR = TC – upper & lower break-even points.Between B1 & B2 TR>TC – profits & also more than Q & less than Q2 will earn profits.

Contribution Analysis

Page 17: eco (Delhi10)

TR

PROFITTC

BEP

COST / FCPROFIT VC

LOSS

QOUTPUT

Contribution analysis is the analysis of incremental revenue & incremental cost of a business decisions or business activity.Contribution is the difference between total revenue & variable costTR – TVC = ContributionBelow the output OQ, the total contribute is less than finale cost which amounts to loss.

Beyond OQ contribution exceeds fixed cost difference is a contribution towards project.Contribution over the time personal indicates the commandment that the mgt. Has made for fixed expenditure & do show when it will be recovered & profit will begin to emerge.

Contribution Line

Fixed Cost &Contribution PROFIT

FC

FIXED COST

QOutput

Profit volume ratioHelps in making product PV ratio that produce taken also PV ratio per unit time is taken as the basis of choice.PV ratio = S-V x 1000

SS = Selling Price V = Variable CostBEP (Sales value) = Fixed Expenses

PV ratioProfit volume analysis charts.

Page 18: eco (Delhi10)

Cost & Sales

Revenue Cash BEP

VC (Cash Outlay)

Profit Line

Profit

BEP

Sales Fixed Cost

Profit Volume AnalysisUse of BEP

- Sales volume to earn a given amount of return on capital.- Profit can be forecasted- Effect of change in vol. of sale, sales price, cost of product can be appraised.- Choice of products or process can be made.- Impact of increase or decreases in fixed & variable cost.- Effect of high FC & LVC on the total cost- Inter-firm comparisons of profitability.- Cash BEP helps in planning of cash requirements.- Emphasis for achieving economy.- Angle of incident & margin safety also helps.

Limitations- Can be applied to only single product system.- It can’t usefully apply if cost & price data can’t be ascertains before hand &

where historical data are not relevant for estimate future cost & price.

MARKET STRUCTORE AND PRICING THEORYMarket – system in which buyers & seller bargain for price.The number of seller of product in a market determines the nature & degree of competition in the market. The nature degree of competition makes the structure of the market.Different types of market structures

- Perfect or pure competition – large number of sellers selling a homogenous product.

- Monopoly – A single seller of product without a close substitute.- Monopoly Competition – A fairly large number of sellers selling different

products.- Oligopoly - A small number of big seller selling the same product (e.g.

petroleum) or differentiated products.

Page 19: eco (Delhi10)

- Bilateral Monopoly – A small number of buyers competing against a small number of sellers.

Pricing under perfect competitor Large number of seller & buyers – No single seller cannot affect the market prices by

changing his supply nor can a single buyer by changing his demand. Monogenetic of Products – Buyers do not distinguish between then nor do they prefer the

product of one firm to that of another, no firm gains competitive advantage. Perfect mobility of factors of production – in or out an industry & from one firm to

another. Frie entry & free exit of forms – no restriction legal. Perfect knowledge – perfect buyers & sellers are fully aware of nature of produce its

availability sale ability & price. Absence of collusion or artificial restraint – collusion like sellers car lets or guilds buyers.

E.g. of perfect competition share market, security bound & agriculture market.Price Determination – Price is determined by the market forces – market demand & market supply.Market Demand – Sum of the quantity demanded by each individual from at different prices.Market Supply – It is the sum of quantity supplied by the individual firms in the industry.Seller in a perfectly competitive market is “price taker” not a ‘Price Maker”.For a Profit maximizing the main problems is to adjust its output to the market price. So that profit is maximum.Mode of price determination (Price & its variation) depends on the time taken by supply position to adjust itself to the changing demand condition.Pricing in Market Period (very short run)In a market period the total output of a product is fixed.Stock is fixed; the supply curve is perfectly in elastic.Price is determined solely by the demand conditions supply is an inactive agent.

S

P

M D2

D1

QEquilibrium point is the point of intersection between demand & supply curves.If demand increases than rent rises from; this place is paring miters for all the buyers. E.g. daily fish markets stock markets daily mill market, coffin market etc. during natural calamity essential mediums during epidemics.Pricing in the short runShort run in which firms can neither do not change their size, nor quit, now can new firms enter the industry. Supply can be increased cord creased by increasing cor-decreasing the variable inputs.Supply curve is elastic

D SD’ MC

Page 20: eco (Delhi10)

ACP AR=MR

P1 P1 D AVC

P2 P’P2 AR’=MR’

D’

Q’ Q MOutput

MC

ACE AR=MR

P1 T N

E’ AVC AR’=MR’ P2

M1 M

Given the price PQ [=OP1] an individual form can produce & sell any quantity at this price.The firms must adjust their output to the price PQ as per their cost curves in order to maximize their profit.Profit is max when MR = MC as price is fixed AR = PQAt point E MR = MC. Total Max. Profit is shown by area P1 TNE.Profit = (AR –AC) QAR = EM, AC = NM & Q = OMProfit = (EM – NM) OM = P1TNEEM – NM = EN Profit = ENEN is the max. Super normal profit at given & cost curves.

Firms may make losses in the short run.It market price decreases to P1Q1 due to downward shift in the demand curve to D’D’ then equilibrium point will be E’ where AR’ – MR’ – MC but AR’ < AC.- Firm increase lossBut since in short run it may not be desirable to close down the production.- The firm minimizes its losses by adjusting its output where it covers its MC. The firm service in the short run so long it covers it MC.No firm is large enough to influence the price friend fixes lower prices it incur loss & if higher prices than sale is less.- Firm must-adjust their output to new market price.Pricing in the long run.

Page 21: eco (Delhi10)

In the long him the firm can adjust their size or quite the market & new firms care enter.If AR > AC firm make economic or super normal profit; supply curve shifts rich toward because new firms get attracted toward the industry causing decrease in price.AR < AL than marginal firms quit the industry causing a leftward shift in supply curve causing an increase in price.This process continues until price is so determined that AR = AC & firms earn only normal profit.

D S1S SMC LMC

S2SAC LMC

D’

LMC

SMC SAC LACAR’=MR’

P1 P0 AR=MR

P2 AR’’=MR’’

Q2QQ1

Pricing under pure MonopolyPure monopoly – signifies an absolute power to produce & sell a product, which has no close substitute. I.e. cross elasticity is either zero or negative.Monopoly industry is a single firm industry. Firm &industry are identical in a monopoly market. Equilibrium of the firm is the monopoly of the industry.The monopoly product has district physical properties recognized by its buyers & distinctness lasts over many years.

Causes & kinds of Monopoly(i) Legal restriction & barriers to entry of new firms(ii) Sole control over the supply of scare & key raw material.(iii) Efficiency & economics of scale. (Natural monopoly emerge out of technological

conditions of efficiency)Public utility sector (Postal, telephone service) franchise monopoly.Pricing & output secession

SMC SAC P1 P

Page 22: eco (Delhi10)

P2M

AR=DMR

O QIn a monopoly market cost coeditors i.e. AC & MC curves in a competitive & monopoly market are generally identical revenue conditions different.AR & MR curves are different under monopoly because, unlike a competitive firm & demand curve is downward sloping.The slope of MR curve is twice that of AR.A profit-maximizing firm chooses a price output combination at which MR – SMC.Given the demand curve AR = D, the output OQ can be sold per time unit at only one price i.e. PQ (=OP1)Out price & profit are simultaneously determined in the monopoly firm. Hence the firm is in state of equilibrium.Profit (AR – SAC) = (PQ – MQ) = PMOQ x PM = P1PMP2 = חTR = P.Q. P = 500 – 5Q TC = 50 x 20Q x Q2

MR = ℓTR MC = ℓTCℓQ ℓQ

TR – TC = ח

- If AR > AC, there is economic profit for the firm.- If AR = AC, the firm earns only normal profit.- If AR < AC, though only a theoretical possibility the firm makes losses.

Pricing & output decision in the long – run.A monopolist gets an opportunity to expand the size of its firm with a view to enhance its long-run profits.Expansion of plant size depends on- Size of the market – expected economic profits – rich of inviting legal restrictors.

SMC1

SAC1 LAC J P1 SMC2

K P2 LMCL SAC

M S

AR=DP

Q1 Q2 MR OutputThe total monopoly profit has been LP2SC. The monopolist produces a larger output & changes a lower price & makes a larger monopoly profit in the long run.Short run equilibrium price P1Q1 equilibrium price P2Q2.

Page 23: eco (Delhi10)

If there are barriers to entry the monopoly firm may not reach the optimal scale of production (OQ2) in the run, nor it may make full utilization of its easting capacity.

Price discrimination under Monopoly.When consumers are discriminated on the basis of these factors in regard to price charged from them it is called price discrimination” e.g. doctors, lawyers, movie, cinema show, railways, & airways, electricity rates for commercial & lower.

Necessary conditions for price discrimination- Different markets must be separable.- Elasticity of demand must be different in different market.- There must be imperfect competition in the market.

Degree of price discrimination First degree – When a seller is in a position to know the price each customer is willing to pay, he sets the price accordingly & tries to extract the whole consumer surplus.He sets the price at its highest level – level at which all those who are willing to by the commodity buy at least one unit each.After extruding the surplus of this section of conducer he gradually lowers down the price. So that surplus of the second unit is extracted & the procedure continues until a surplus available at a price where MC = MR.Second degreeIn large sized market second degree price discrimination or block pricing method is used.

DA

P3

Price B P2

B P1

D1

Q1 Q2 Q3 OutputThe marketer siphon off only the major part of the consumer’s surplus.He divided his potential buyers in blocks rich middle & poor.Highest to rich & SOON

(a) No. of consumer is large(b) Price rationing can be done.(c) Single rate is applicable for a large no. of buyers.(d) Demand curve for the entire consumer is identical.

Third degree – Different prices in different markets having different elastic ties.In each market.MC & MR in each market is equaled & price in each market is fixed accordingly. Price-quantity combination that can maximize his profit in each market is chosen.

Market A Market B Total Market

B

Page 24: eco (Delhi10)

A

S RD

MRaQ

It is profitable in two or more markets separated from each other by geographical distance, transport barriers or cost of transportation, legal restriction on the inter – regional or inter state transportation of commodities.

Measure of Monopoly Power.- No. of firms criterion - Concentration Ratio

Pricing Under Monopolistic competitionMonopolistic competition is defined as market setting in which a large no. of sellers sell differentiated product.

- Large number of sellers.- Free entry & free exit.- Perfect factors mobility.- Complete dissemination of market information.- Differentiated products.

In monopolist products are differentiated by brand name, trademark, design, color & shape, packaging credit terms.Despite products differentiation each product is a perfect substitute for the revel products.Decisions are not absolutely independent of each other in perfect competition.Short run price & output determination

SMCP1 P SAC

P2

N ARMR

Q outputThe economic profit PM (per unit) exists in the short run because of no possibility of new firms extiring the industry.Rate of profit would not be same for all the firms under monopoly competition because of different in the elasticity of demand. It price is ↑ than more than normal profit. Some firms will have lower profit because of higher long run price & output.The existence of economic profit attracts new firms, which intensifies the competition on one hand but reduces individual firms share in the total supply.

LMC

Page 25: eco (Delhi10)

LAC

Revenue/Cost

ARMR

OutputAt the stage where AR = /AC. At equilibrium point the existing firms step their expansion & new firms ease to enter the industry.At OQ Quantity & PQ Price all firms earn normal profit as PQ = /ACWhen all the firms reach their equilibrium point there will be no tendency of new firms entering or old firms of new firms entering or old firms quality the industry.Price Determination under oligopolyOligopoly is a reduced form of monopolist competition. It is competition a man few big seller, each selling either differentiate or homogenous products.Few – the number is so small that market share of each firm is so large that it can influence the market price.Automobile industry is an outstanding e.g. differentiated oligopolies.

Oligopoly

Homogenous Heterogeneous (or pure) (Homogenous Product) (Differentiated Productse.g. cooking gas, cement, baby food, e.g. automobile, Cigarettes, vegetable oils, cable wire, dry batteries etc. Refrigerators & TV etc.

Interdependence & inter determinateness of priceDue to fewness of their number oligopolies are in keen competition with each other. The competition between them takes the form of action reaction & counteraction in the absence of collusion between competing firms. In this kind of a market firm’s business decision become independent.The competition between oligopolies generally takes 3 forms.

- Free competition in which oligopolies wage price war against each other fight tooth & mail which ultimately takes the form of non-price competition. (Kind demand curve analysis)

- When competition is among unequal the larger firms plays the row of price-maker & smaller ones become the price-taker.

- Collusion between firms under cartel system of price agreement. (Collusion models)

(Different models form book)

Price leadershipPrice leadership is an informal position of a firm in roast oligopolsta industries,

Page 26: eco (Delhi10)

Economics of scale or form’s ability so forecast market conditions accurately or a combination of these factors. Typical case played by the dominant form the largest form in the industry the dominant from the largest form in the industry, the dominant form takes lead in making price changes $ the smaller ones follow.

In the barometric price leadership one of the firms not necessarily the dominant one takes lead in announcing change in price, particularly when such a change is due fat is not effected due to uncertainty in the market. Such price leadership exist only → number of forms is small → entry to the industry is restudies→ Products are, by large homogenous.→ demand for industry is inelastic $ has very low elasticity → forms have almost someday cost curves.

Collusion model: the cartelA cartel is an association of business forms formed by an explicit agreement between then.

Under cartel agreements “the forms jointly establish a cartel organizations to make price $ output decisions to establish production quotas for each form, $ to supervise the market act vices of the form in the industry.Cartel are formed with a view to

(1) Eliminating uncertainly sorrow riding the Market .(2) Restraining competition $ thirdly ensuring monopoly gains to the cartel group.

Pricing salaries Cost- pals pricing or Mark –up pricing

p=AVC+AVC (m)AVC (m) =gross profit margin (GPM)

Mark-Up pricing

P=AVC+ AVC (m)= AVC (1+m)MC =MR (profit max)MR = P (1 -1/e)

Pricing new product

Skimming Penetration

Pricing theoryCost plus pricing or Mark-up pricing“Average Cost Pricing” or “Full Cost Pricing”Under this method is adding “fair” percentages of profit margin to the average variable cost (AVC).P = AVC + AVC (m)M is the up percentage AVC (m) = gross profit margin (GPM).M is the mark-up percentage.AVC (m) = gross profit margin (GPM).Mark-up percentage (m) is fixed so as to cover average margin (NPM). Thus AVC (m) = AFC + NPM

Page 27: eco (Delhi10)

The firm estimates the average variable cost by ascertaining the volumes of its output for a given period of time. The optimum level of output or capacity output is used as standard output in computer the AC.TVC = Direct cost (cost of labor & raw materials) + other variable costAVC = TVC (Standard output)

QsMark-up firms always take into account what the market will bear & the competition in market.Mark-up Pricing & Margin list Rules“Rule of thumb” method.

CAPITAL BUDGETING AND INVESTMENT DECISIONSCapital budgeting is essentially a process of conceding, generating, evaluating & selecting the most profitable projects for investing the funds available to the firm.

Pre-requests of capital budgetingCapital Expenditure: - only long-term capital expenditure i.e. those in adjustable in the short-run are taken into. Those involving a commitment for at least one year are considered. Items in capital budgeting.

Expenditure on new capital equipments. Long-term assets Expansion or diversification Addition to existing stock of capital Replacement of depreciated capital. Advt. which bear fruit over time. Research development & innovation.

Deciding Planning Period Uncertainty forecasting Judgment & hence a careful planning.

Effective planning execution & control. Possible dovetailing of old plan with new ones. Assement of economics of scale & determination of plant size. Financial planning & timely acquisition of necessary finances.

Choice of decision rulesThe criterion & decision rules are chosen on the basis of objective of the form such as profit assets building, a regular costs flow etc.1st step – Define the objective of investment.2nd step – Evaluating the project important evaluating – criteria are

Discounted cash flow (present flow criterion) Net present worth Internal rate of return. Pay back period.

3rd step – approach for the final selecting of projects.Two approaches

Accept-reject RankingLimited funds & firm has to select from large amount of funds & invest in manyFew no. of mutually exclusive & alternative project at a time rank all the projects underProjects. Consideration projects whose cost = its return is

Selected

Page 28: eco (Delhi10)

Collection of Necessary Data Cost of Capital Projects.

(1) Expected Rate of Return.(2) Availability of Alternative Projects.(3) Period of Fruition, Maturity & Overall Long activity(4) Market Rate of Interest(5) Degree of Uncertainty

Demand For CapitalInvestment Criteria & Decisions(a) Pay-back period (Payout)Defined, as the time required recovering the total investment outlay from the gross earnings.Pay-back Period = Total investment outlay

Across return per period

Project cost = 40,000Yields an annual income of RS.8, 000 than pay back period = 90,000 = 5

8,000Year Total Fixed Outlay Annual cash flow Cumulative (TC)1 10,000 4,000 4,0002 3,500 7,5003 2,500 10,0004 1,500 11,5005 1,000 12,500

Pay back period is 3 yearProject with lowest pay back is preferred.NPV A rupee received today is worth more than a rupee rejected tomorrow.

NPE = PV – C

= N Rn I - CΣ (Hr) n

J = 1C = Total Cost of Investment

TPC = ∑ Cn J=1 (1+r) n

= ∑ Rn-Cn J=1 (1+r) n

NPV>0 is selected

One with higher NPV is preferred.

IRR (Break Even Rate)

Page 29: eco (Delhi10)

N N∑ Rn - ∑ Cn = 0J=1(1+r) n J=1 (i+r) n R= IRR IRR > marketing rateThen its worth to invest & borrow OLIGOPOLY

Kinked demand curve3 curves

(1) Rival firms follow the price ranges both cut & hike(2) The rival firms don’t follow the price changes.(3) Rival firms don’t react to price-helps but they do follow the price-cuts.

d MC2MC1

DP

D’

d1

MR

To begin with, let us suppose that market demand curve for a product is given by dd, curve & that the initial price is fired at PQ.Now let one firm change its price if rival firms react in manner (i) I.e. they react with ↑ for ↑ & ↓ for ↓ the price changing firm will move along the demand curve dd. & it rival firms do not follow the price changes, then the price changing firm will move along the demand curve DD’.Dd’ based on (i) is lost elastic than DD’ based on reaction (ii) Now let us suppose the firms behave like (iii) which is more realistic; now let firm ↑ its price rival firms will not follow; demand for its product decreases considerably indicating a greater elasticity. The firm is therefore forced down form Demand curve dp to DP. Thus the relevant segment of demand curve for it is DP.Now suppose alternatively the firm’s ↓ its price. The rival firms ↓ their price otherwise they would lose their customers. This prevents the firm to gain felt advantage of price cut along the demand curve below paint P rotates down. Thus the relevant segment of demand curve for the oligopolies is Pd’. The two relevant segment of the demand curve relevant demand curve DPd’ which has “kind at point Po’.Now let us draw MR curves. MR curve drawn on the basic take the shake a discontinuous curves DJKh.Dj Correspond DP.Kl Correspond Pd’.Now let draw MC curves original is MC’ intersecting MR at K since at output OQ MR = MC, the firm makes max. Profit now even if MC shift to MC2 or any level between J & K, the firms profit is not affected.

Page 30: eco (Delhi10)

Output & price both are stable.

PRICE LEADER SHIPMC2

MC1

AC1

Q1 Q2Dominant firm

D Sm

P3 P3 MC

P’ A B P’

P2 P1 Dm MR AR

Cartel

MC1 MC2 MC

PAC1 AC2

Q1 Q2 QProduction: - Defined as the conversion of inputs – men, machines, materials, money, methods & management (6Ms) into output through a transpiration process.

Input- Men- Machines- Materials - Money- Methods- Mgt.

ProcessTransformation Process

Output- Goods- ProducedOr- Services - Rendered

Page 31: eco (Delhi10)

Production involves the greatest bulk of the companies employees bulk of the companies employees & is responsible for a large portion of firm’s assets

It has a major impact on the quality of the goods & cost of production. It is the central fun of an org. or we can safe production as the heart of any org.

FINANCE

PRODUCTION HRM material mgt.

MARKETINGProduction Mgt. Function

(a) Planning Product PlanningFacilityDesigning of the conversion process

(b) Organization Determines the activities required to achieve the operations. Sub-systems goals & assign authority & responsibility for currying them out.

(c) Controlling Includes all activities that ensure that actual performance is in accordance with planned performance.

Objectives of production mgt.Main objectives of any firm is to Increase profitability by

Higher efficiency Higher Productivity Improving quality Give customers more confidence

Achieved by Optimal use of resources Use of manpower, machines or machining wastage of materials. Ensuring quality of goods at manual cost through use of SQC. Constituting toward all round productivity through decision-making QT/OQ techniques.

Scope of Production Mgt.(1) Activities relating to designing or formulation of the production system.(2) Activities relating to analyzing & controlling of production operate after the prod. System

has been activates.

ControlFeedback

Page 32: eco (Delhi10)

Activities To Produce System Designing

Location Plans Plant layout

Design of Tool & Drawing Selection & Operation of Designing Development Size of firm

Selection of the Materials Handling Overall plan Handling System

Activities relating to analysis & control of production

Production Planning Production Control Control of quality through process control

Control on inventory Control on Such as raw materials work in process Purchased parts Finished goods etc.

Decision Making in Prod. Mgt.Determines how firm’s resources can most effectively be utilized.

POM

Strategic (decision have tactical (can be implemented in one Implication of long duration year or less)Over one year

Major decisionsHuman resource Mgt.Location & facility engineering LayoutMaterials Mgt.Process designing & equipment selectionMaintenanceInventory controlProduct controlQuality assurance controlProduct design

Productivity & wastivityThe efficiency with which the inputs are converted into output i.e. effectiveness of outputs & inputs is called productivity of the system.Conceptually productivity is defined as an attitude of mind & prevention of all kinds of waste.Mathematically Productivity = Output

Input = Goods or services produce

Page 33: eco (Delhi10)

Σ all factors of production

Productivity IndicesWhen both input & output are in the same unit productivity reduces to moor number.It can be expressed as % of output to input or OMS – output per man stable or production/monthGNP (Gross national product) as per capital income or output per hectare.For incentive schemesProductivity = SMH

AMH= Standard Man has earned

Actual Man has workedWastivity – Inverse of Productivity ProductivityThe measurement of wastage or tool for measuring the efficiency of inputs is called wastivity.

Wastes Are

Idling of resources

Production of defective goods & Services

Excessive Maintenance delays

Higher conversion Goods Produced not As per specifications Factors for improving productivityProductivity = Output

InputCan be increased by ↑ output keeping input const.Or reducing for same output.Or increasing output proportionately higher than increases affected in inputs.Factors contributing to increase of productivity can be summarized as:

Better utilization of resources like men, machines & materials. Listing efficient & effective methods of working. Good & systematic plan laid outs. Proper maintenance policy. Appropriate technology Better HRM methods. Modern HRM methods mgt. By MBO rather than by crises etc.

In a manufacturing unite the etc. time allowed for the production of a unit as 5 hrs. If in a particular month 126 units are produced by employing a persons & an allowable delays are found to be 44 members.ESH = Earned standard hrs.STD Time/unit = 5 hrs.Production = 126 unitsESH = 5 x 126 = 630 hrs.AMH = available man hrs.Manpower employed = 4PMonthly working hrs. = 4 x 25 x 8

Page 34: eco (Delhi10)

= 800 hrs.Allowed delays = 44 hrs.AMH = (88-44)

= 756 hrs.Productivity = ESH x 100

AMH= 630 x 100 756= 83.33%

Wastivity = 100 – 83.33%= 16.67%

Product selection & product developmentNew Techniques

Autonomous work teams in which Lean Production systems; workers areResearch marketing etc. are given more organized in work teams & parts & toolsFreedom & responsibility for the enter are positioned to where they are needed.& development effort; Save huge amount assembly line use more co-ordination of time & money. With customers.Product design directly affects product quality production costs & customer satisfaction; product design is crucial to success.During the designing of products following pts. Are taken into consideration.

1. The detailed ch. Of each product are established.2. The ch. Of a product directly affect how a product can be produced.3. How the product is produced determines the design of production system.

Ch. Of product

How product can be produced

Design of prod. System.

Product designingProduct innovation sourcesDeveloping new productsGetting new products to marketImproving the designed crusting productsDesigning product for case of prod.Designing products for quality

Sources of product innovation

Customers Engineering Managers Marketing ProductionThe formal research department, which work toward the design & development of new products & services & prod process.

The marketingFunction &Market

1. Technical & economic feasibility studies

2. Proto type design.3. Performance testing of proto type

design.4. Market sensing & evaluation &

economic evaluation of proto type.5. Design of production model.6. Market performance process testing

& economic evaluation of prod. Model.

7. Continual modification of prod. Model.

The prod. Functions its tech. Neologies& Its process

Page 35: eco (Delhi10)

About 5% of all new-product ideas survive to production & only about one in ten of these are successful. It is best to cancel unpromising new-products services development projects early so that human effort development money can be directed toward more promising projects but it is not possible.

Getting new products to market asterTo succeed in global competition companies must design, develop & introduce products faster.Companies can do it by use of autonomous design & development teams.MNCs like IBM etc. are given decision-making responsibility & more freedom to design & introduce new products.Time ↓ & cost ↓; times do not deal with red tape or bureaucrat or another method is with the use of CAD/CAM.Engineers can store design in database & change as per the requirements.The concepts of simultaneous engineering have significantly compressed the design production & introduction cycle of new products is called concurrent engineering.

Continuous Inebriation

Improving the design of crusting productsThe focus of this effort is to improve performance quality & cost with the objective of maintaining or market share of mattering products e.g. refining of products in order to sure money.

Products /service ideas

Economic & technical festivity studies.

Product/service Design

Prod. Process Design

Product & Market New Products / service

Page 36: eco (Delhi10)

Designing for case of productionDesign products for case of production is a key way for man factures to be competitive with foreign manufacturers.

It includes

Specification detailed Standardization design activity Simplifications Description of a material that reduces variety among an elimination of Part of product including group of products or parts. Complex features soMeasures such as viscosity standardization leads to reductions that the intended Surface finish PH Value etc. in no of models results in higher funct. Is performed

Quality or more customers with reduction cost.Satisfaction.

Designing for quality: - quality into the product designer is the first step in producing products of superior quality.Quality is determined by the customer’s perception of the excellence of the ch. Of produce & services.

Designing Developing New Services

Degree of standardization degree of customers contact mix of physical &Of a service in delivering the service intangible service.

Process planning & designProcess planning is intense for new products & services but planning can also occur as capacity needs change business or market conditions change or technology sufferer machines become available.The type of production process to be selected must necessary follow directly from the operation strategies.Once process planning has been completed the fundamental structure & character of the operations function is set.

The process planning & design system

Major factors affecting process design decisions(1) Nature of Product/service demand

Inputs- Products/service

demand- Prices/volumes - Patterns- Competitive

environment- Consumer

wants/needs- Desired product

ch.

Process planning & design- Select process type- Vertical

integration studies- Process/product

studies- Equipment studies- Production

procedures- Facilities studies

Output- Technological

Process- Facilities- Personnel

estimates

Page 37: eco (Delhi10)

Productions process must have adequate capacity to produce the volume product services customer wants.(2) Degree of vertical integration Integration with supplier customers less in new org.Now a days outsourcing is the strategy.

Production flexibility

Degree of automationCan reduce cost & time of labor increases product quality & flexibility.

Product/service qualityTraditionally it was only way to produce products of high quality was to produce products in small quantities by expert craftsmen but mass production is also mass production is quality.Types of process designsProduct- focused – describe a form of production processing orgn. in which prod. Departments are organized according to the type of product/service being produced.Also known as production line or continuous production.It tend to follow direct linear trashing precuts / services lend proceed through production without stopping.Continuous path of raw materials components sub assembles follow in the product focused production.

Applied to two general form

Product focused requireHigher initial investment levels because of

(1) Use of more expensive, fixed position materials handling equipment such as overhead conveyors.

(2) The use of equipment that is specialized lot a particular product such a automatic welding machines product flexibility is now.

Product FlexibilityChange from one product to other in custom-design products

Volume flexibilityIncrease or decrease in production volume flexibility is needed whom demand is subject to ↑ or ↓ & it is a capital-intensive process.

Describe unit manufacturingDistrict or separate products such as automobiles produced in batches.

Process manufacturingMaterials are moved between production operations such as screening grinding etc. common in food, brewing, and chemical industry.

Page 38: eco (Delhi10)

Advantages lower labor skill requireReduced worker trainingReduced supervisionCase of planning & controlling prod.

Process-focused describe a form of prod. In which prod. Operations are grouped according to type of process also referred as intermittent production on a start & stop basic or also known as job shops; products move form dept. to dept. in batches that are usually determined by customer’s orders.Zig-hag type routes with

Job X

Job Y

Job spend the large majority of line in waiting used to hospitals, automobile repair etc.Adv. Less initial investment

Less expensiveMobile material handling equipment

Disadv. More supervisionMore skilled & trained employeeComplex prod. Planning &control

Group technology / cellular manufacturingGT code to each product

(1) It is easier to determine how to route parts through production (2) Number of part designs can be reduced.(3) Parts with

Cellular Manufacturing

Debur Debur2Debur3 Debur4

Drill 1 Drill 2 Drill 3

Saw 1 Saw 2Saw 3 Saw 4

6

1

2 3

5

4

1 2 3

45

6

7

8

Page 39: eco (Delhi10)

Raw

FinishedProduct

Deciding Among Processing Alternatives Batch Size. Large A

Dedicated System

Small

Many Number of Product Design

Grinder1 Grinder2Grinder3 Grinder4

Lathi1 Lathi2 Lathi3 Mill 1 Mill 2Mill 3 Mill 4

Saw2 Lathe3

Grinder3

Drill

Mill 1Debur3

Product Focused B

Product focused batch System

Cellular Manufacturing

Process Focused Job Shop

Page 40: eco (Delhi10)

Capital Requirement For Process Design

Economic AnalysisCost Function Of Processing Alternatives Job Shop

Cellular

Automated

2250000

11100000 500000 100,000 250,000 Number Of UnitsBreak Even Analysis

Don’t have time Value of moneyFinancial Analysis: Process & Control Chart

Process F.C. V.C. A $ 110,000 $ 2 B 80,000 4 J 75,000 5 At 10,000 units per year

Process C A

5,000 15,000 Production planning & controlProduction planning – It is concerned with the planning of various input (Men, Machines, Materials etc.) for a given period of time so that the customers could get right quality of products at right place, period & in time.

Planning

Page 41: eco (Delhi10)

Long strategic Medium Aggregate Short routines

Production control – measures the actual performance of the production units & taking remedies action called for to see that the production is actually in not less than the target or standard set in advance.Main functions of p roduction planning & control.

(1) Order preparation(2) Materials planning(3) Routing (4) Scheduling(5) Dispatching(6) Progressing (Control) i.e. collection of data from various manufacturing shops

recoding the progress of work & comparing against the plan.(7) Expediting – Chasing intensively the bottle need areas causing delays

interruptions in carrying out smooth prod. & taking appropriate action from time to time.

Production planning problems in job shop production & continuous (mass products) systems.Problems depend upon the following factors:

(a) Product variety & production quantity.For job shop prod – Low quantity product complex consisting of many components each of which must be processed through multiple operation requires detailed scheduling & co-order ting of large member of different components.Mass prod – More or single product in large quantity production impel for large components facility is organized as a product size.For job shop – planning is emphasized For mass prod – controlling is emphasized.

Aggregate planningPlanning is done at the broadest level. The details of the individual product requirement the detailed scheduling of various resources & other faculties is normally left to the individual at lower level to carry.

Various steps involved.(1) Forecasting of resources (normally up to a years time)(2) State of system at the end of last period.(3) For the upcoming period the size of workforce & prod rate.(4) The above decision could leads to herring are firing of personnel thereby

expanding or combating the effective capacity of the productive system.(5) Technique of aggregate planning are

Graphical method Linear decision rule (LDR)

OBJECTIVE(1) Make use of the available facilities & resources to ensure their optimum use.

Page 42: eco (Delhi10)

(2) Increases the range of attritions for capacity by fixing the size of work force & production rate.

(3) Inventories for work – in progress & finished goods are made during ban demand so as to use the same to melt the peak demand.

(4) More time is devoted to produce more from the same machinery capacity though properly employing the sequencing & scheduling technique.

Variables studied under the aggregate planning are: - Prod rate Labor employment Investment

Sub-controlling (if permissible)Strategies involved in aggregate planning

(1) Without changing Prod level – during loan demand sale can be ↑ by special discount schemes cutting prices etc.

(2) During periods of ↑ method of back logging of orders can be of adopted like it demand on the willingness of the customers.

(3) Change in prod level – when demand ↑ the output can be changed by herring workers temper airily production can be increased by keeping workers on overtimes or through special incentive sachems or through special incentive schemes by altering capacity by increase of few equipments machinery by changing the planned plan shut downs.- Demand ↓ changing output by logging of demotating employees or reducing capacity by switching of part machinery.

By appropriate inventory levelInventory of furnished good ↑ during period of low demand & it can be used to meet high demand seasonal demand.

Sub-contractingThrough acquiring part of goods from other manufactured producers rather than making in house.

Capacity utilization Common to service industries orgn. Companies, which can’t short products, are services.E.g.April 200 20 Oct 200 20May 81 27 Nov 176 22June 210 27 Dec 84 28July 560 28 Jan 108 27Aug 805 23 Feb 190 19Sept. 100 25 March 450 25

Show daily requirement, cumulative demand & average demand.Month Forecast No. of Demand Cumulative Cumulative

Page 43: eco (Delhi10)

Demand days Per day Per day units200 20 200/20=10

Average demand = Total Demand Total prod. Days

Varying work force level to meet demand.Month Demand Working DaysApril 1000 25May 2340 26Jun 846 24July 1674 27Aug 1408 22Sept. 1512 18Company employee’s 20 persons at an average salary of Rs.222/- months. Each unit of prod. Requires 4 standard hers. Herring cost = Rs.1500 month. Month Men Reqd.

100 x 4 = 2025 x 82340 x 4 = 4526 x 8

= 18= 31

20 x 2000 = 4900045 x 2000 = 90000 + 25 x 1500

Keeping work force fixedNumber of men employed = 30.Inventory carrying cost = Rs.6/unit/monthShortage Cost = Rs.100/unit/month

Men Reqd. Regular salary InvestorsApril 30 60000 = 30 x 2000 1500-1000 = 500May 30 60000 500 + 1560-2340 = -280June 30 60000 -280 + 1440 – 86 = 296July 30 60000 296 + 1620 + 1674 = 242Aug 30 60000Sept. 30 600001500 = 25 x 8 x 30

4= 1500

MRPMaterial planning is a technique of determining the requirements of raw materials components, spares etc. required for the manufactured of the product.If the delivery data of the finished products is known in advance the ordering time & quantity of other work in progress can be planned accurately with the help mathematical calculate while doing MRP keep in consideration

Page 44: eco (Delhi10)

Components sub in assemblies & assemblies are know so that they all can participate for the planning of required materials.

Inventory in hand.

MRP Process

NO

YES

.

E.g A, LT = 2

B (2) LT = 1 C (4) LT = 3 D (3) LT = 2

E (3) LT = 3 F (3) LT = 3 G (5) LT = 3 H (6) LT = 1

D racket indicate no. of units required LT = Lead-time.If 100 units of ‘A’ are required to be slipped in 8 weeks.(1) Purpose the bill of materials (2) Find the required of various item at different level.(3) Draw the planned under release

Bill of materialItem: APart code Number Required Level

Customer’s orders for finished goods

Forecast for the finished goods

Master Production schedule

Product Design & structure

Inv. On Hand

Material Requirement Plans

Lead times

Final Master Schedule & MRP

Is Capital Adequate

Page 45: eco (Delhi10)

B 2 1E 3 2F 3 2C 4 1D 3 1G 5 2H 6 2

A, LT =2

B(2) LT = 1 C(3) LP = 2 D(L)LT=2

E(3) F(2) G(2) H(3)LT=3 LT=1 LT=2 LT=3

N(2) O(1)K(1) I(2) M(3) LT=1 LT=2LT=1 LT=2 LT=3

P(2) O(3) LT=1 LT=2

100 Units on 12th day.

CPM & PERT

A must be completed before b.

a b

b & c can occur concur entry. But after a is finished.

1

1

Page 46: eco (Delhi10)

ba c

d & b must be finished before c & d a c b d

a b Dash shows dummy a before either b or c &

both must be completed before d.

c a b d

a & b must be completed before activity c & b a b must be completed before d.

b d

a =20 b =10 c = 8 e== 7 f = 6

d = 11 Dummy h = 13 I =5

G =12

CPM with highest EF

EF= earliest finish.

LF of f & I = 63

LFh = Lfi – Di

1

1

1

2

3

2

1

1 2 3 4 6 8

5 7

Page 47: eco (Delhi10)

Lfe = LFh – Dh Latest elopsed finished

Slack

S = LF – EF

Lfi = EF1

Activity optimistic Most likely pessimer to tm tp

Mean duration to + 4tm + t p6

2 tp - to

Variance6

Variance of path i.e CPM = V a + V b + V c addition of Var.

U Path = V

Probability of computing.

= given - actual U Path