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Organizing Production Using Economic Principles

Organizing Production Using Economic Principles. Chapter 10. Production Management. An agribusiness manager transforms inputs into an output through production management This is a two-step process The process must be technically efficient (maximum output/unit of input)

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Organizing Production Using Economic Principles

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  1. Organizing Production Using Economic Principles Chapter 10

  2. Production Management • An agribusiness manager transforms inputs into an output through production management • This is a two-step process • The process must be technically efficient (maximum output/unit of input) • The process must be economically efficient (maximum profit)

  3. The Production Process • What is the production process? • Three major types of production decisions for an agribusiness manager • What to produce • How to produce • How much to produce

  4. The Production Function • A way to describe the technical relationship between inputs and outputs • Summarizes the outputs possible from different levels of input use

  5. Determining the Rational Production Range • The principle of diminishing returns shows that as more of an input is applied production rises but not in a straight line forever

  6. Stage I Irrational Stage III Irrational Stage II Rational C B TP (total product) A Output of fertilizer AP (average product) MP (marginal product) Input of natural gas The Production Function for aNitrogen Fertilizer Plant

  7. Determining the Point Economic Efficiency • Total product, average product, and marginal product must be combined with prices to determine the point of economic efficiency (maximum profit) • Incremental or marginal analysis • Equimarginal allocation principle

  8. Discussion Questions 1. Explain in your own words why production does not increase in a straight line forever as more input is applied. Give an example of a situation that supports your argument. 2. Define and explain the relationship between economic efficiency and technical efficiency. Show how a manager would use them to achieve her objective of maximizing the long-term profits of the firm.

  9. Discussion Questions 3. Agribusiness managers face three major production decisions—what to produce, how to produce, and how much to produce. Where does a manager find the answers to these three questions? Why are these answers important? 4. Define and explain the difference between the efficiency and contribution of input use in production management decisions. 5. What is the rational range for production as defined in this chapter? Explain the lower and upper bounds of the area and why they exist where they are.

  10. Discussion Questions 6. Explain in your own words how to locate the point of economic efficiency within the rational range of production. 7. Explain in your own words the principle of diminishing returns. Explain why the production function increases at an increasing rate, increases at a decreasing rate, reaches a maximum, and then declines as more input is added. Give an example to illustrate the use of this principle.

  11. Discussion Questions 8. Explain in your own words the principle of equimarginal allocation. How does it relate to the marginal product concept discussed in the chapter? Give an example to illustrate the use of this principle.

  12. Discussion Questions 9. Explain how an agribusiness manager combines the production management decisions given in this chapter with those involving consumer demand to operate a profitable business. 10. Why is technical efficiency a prerequisite to economic efficiency?

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