QIS college of engineering and Technology
2 –Mid mini project
K. Chandra sekher
k. Chandra sekher
A Study on
Mini Project Report in Managerial Economics Submitted to JNTU, Kakinada
In Partial Fulfilment for the Award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
Koppula. Chandra sekher
(Reg. No. 13491E0037).
DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATION
QIS COLLEGE OF ENGINEERING & TECHNOLOGY
An ISO 9001: 2008 Certified Institution and Accredited by NBA
(Affiliated to JNTU, Kakinada and Approved by AICTE)
Vengamukkapalem, Pondur Road
ONGOLE –523 272 .
Need for the study
Scope of the study
Review of literature
Production process & functions
Production with one variable &two variable
Iso quant‟s & Iso cost
List of combination o inputs
Cob Douglas production function
Law of return to scale
Economics and diseconomies scale
The purpose of the paper is to explore the potential of autopoiesis theory to open up new
ways to understand knowledge production in business organizations.
Initially essential theoretical information is presented, by reviewing the concept of
knowledge-based competitive advantages in business organizations, and describing the
notions of autopoiesis as a basis for the understanding of knowledge production in
organizations, and micro-macro problem within the companies' structure and production.
After that follows the main content of the paper, namely descriptions of processes
influencing knowledge production in business organizations .
Knowledge is embedded in social practices and a local setting and it is very much tacit
in nature providing then a basis for creating a sustainable competitive advantage for
business organizations. A business organization's memory and production are mutual
media for one another in autopoietic recursive processes.
Finding a viable perspective and approach with which business organizations can
understand how their knowledge production takes place is an important issue. It is
claimed in this paper that the idea of autopoiesis can potentially provide a new
understanding for business organizations' knowledge production.
Kaj U. Koskinen, (2013) "Business organizations' knowledge-production
processes: an autopoietic approach", International Journal of Organizational
Analysis, Vol. 21 Iss: 2, pp.137 – 153
10.1108/IJOA-05-2011-0490 (Permanent URL)
I so-quant, I so cost, Land, Labour, Capital, Organization,
Production is an important economic activity which satisfies the wants and needs of the
people. Production function brings out the relationship between inputs used and the
resulting output. A firm is an entity that combines and processes resources in order to
produce output that will satisfy the consumer‟s needs. The firm has to decide as to how
much to produce and how much input factors (labour and capital) to employ to produce
efficiently. This chapter helps to understand the set of conditions for efficient production of
Production is an activity that transforms inputs into outputs (or) conversion of resource into
commodities. “Production is the organized activity of transforming resources into finished
products in the form of goods & services”. The features of production mainly are as
Both physical & mental activity is production.
It must satisfy the other people‟s wants.
According to samuelson,”the technical relationship which reveals the maximum amount of
output capable of being produced by each and every set of inputs”.
According to Michael R.Baye, “that function which defines the maximum amount of
output that can be produced with a given set of inputs.
From the above definitions, it can be seen that:
The production function is more concerned with physical aspects of productions. It is
the concerns of the engineer rather than that of the manager. To know how much be the
production with a given set of inputs.
Production function is defined at a given stage of technical knowledge. It means that
if there is any technological breakthrough, there be further jump in the volume of
production for the given set of inputs.
Production function is an engineering relation that expresses the maximum amount of
output that can be produced to within a given set of inputs.
At any given time, the output from a given set of inputs is always fixed.
Production function enables us to understand how best we can make use of technology
to its greatest potential.
Need for the Study:
The competition is becoming truly global, with fragmented markets and customers
expecting to get the best product at the best price with immediate availability. In this
business environment we need to be agile to handle changes within the production system
as well as changing the system to new circumstances. This paper is investigating the
concept of agility and how it can be applied within industry. A proposal on how to make an
“agility” analysis from a production system perspective is presented and a case study has
been performed to test this analysis in practice.
Scope of the Study:
Life Cycle Assessment (LCA) aims to analyze possible impact upon manufacturing process
and availability of products, and also study the environmental considerations and potential
influence during entire life cycle ranging from procurement, production and utilization to
treatment (namely, from cradle to tomb). Based on high-density polyethylene (HDPE) pipe
manufacturing of company A, this case study would involve evaluation of environmental
influence during the production process. When the manufacturing process has been
improved during “production process” and “forming cooling” stage, it is found that capital
input on “electric power” and “water supply” could be reduced, thus helping to sharpen the
competitive power of company A, and also ensure sustainable economic and industrial
development in accordance with national policies on environmental protection.
To know production with one variable
To Study cob-doglegs production function
To Evaluate production with two-variables
To know that law of returns to scale.
This data collected from electronic sources collected from the electronic sources i.e.,
from the Google and the related websites and also Class subject materials.
Review of literature:
Input-output relationship or production function
Production function with one variable input and laws of returns
COBB- DOUGLAS production function
Least combination of input.
Marginal rate of technical substitutes.
Input-output relationship or production function:The inputs for any product or service are land, labour, capital, organization & technology.
Q = f(L1, L2, C, O, T)
Q = quantity of production
f = function is the type of relationship between inputs and outputs.
A manufacturer has to make a choice of the production function by considering his
technical knowledge. He uses lower costs of inputs for a given level of production.
Some factors of production may be important and the relative importance‟s of the factors
depend upon the final product to be manufactured.
Ex: In software industry, land is not an input factor as significant as that in case of an
In the case of an agricultural product, increasing the other factors of production can
increase the production, but beyond a point increased output can be had only with
increased used agricultural land. Investment in land forms a significant portion of the total
cost of production for output; where as in the case of the software industry, other factors
such as technology, capital, management and others becomes significant. With change in
industry and the requirements the production function also needs to be modified to suit to
Production function with one variable input and laws of returns:The law of return states that when at least one factor of production is fixed or factor
input is fixed and when all other factors are varied, the total output in the initial stages will
increase at an increasing rate, and after reaching certain level of output the total output will
increase at declining rate. If variable factor inputs are added further to the fixed factor
input, the total output, may decline. The law of returns is also called the law of variable
proportions or the law of diminishing returns.
Output with fixed capital and variable labour inputs:
Stage - II
Stage - I
Units of labour (variable inputs)
In the short-run, it is assumed that capital is a fixed factor input and labour is
variable input. It is also assumed that technology is given and is not going to change.
Under such circumstances, the firm starts production with a fixed amount of capital and
uses more and more units of labour. In the initial stages, output increases at an increasing
rate because capital is grossly under utilized. Productivity will increase up to point „A‟
where more and more units of labour are increased. After point „A‟ output increases at a
declining rate till it reaches maximum at point „C‟. After point „C‟, the total output declines
and the margined product of labour is negative. Thus indicates that the additional units of
labour are not contributing anything positively to the total output. Even if labour is
available free of cost, It is not worth using it.
Production function with two variable inputs and law of returns:A production function requires two inputs, capital (C) & labour (L) to produce
a given product (Q). This can be more than two inputs in a real life situation, but for a
simple analysis, we restrict no. of inputs to two only. The production function based on
two inputs can be expressed as,
Q = f (C, 2)
Normally, both capital and labour are required to produce a product. These two
inputs can be substituted for each other. Hence the producer may choose any combination
of labour and capital that gives the required no. of units of output. For any given level of
output, a producer may hire both capital and labour, but he is free to choose any one
combination of labour and capital out of several such combinations. The alternative
combination of labour and capital yielding a given level of output are such that if the use of
one factor input is increased, that of another will decrease and vice versa. However, the
units of an input foregone to get one unit of the other input changes, depends upon the
degree of substitutability between the two input factors. Based on the techniques or
technology used, the degree of substitutability may vary.
Iso = equal Quant = quantity
Isoquant = the quantities throughout a given Is quant are equal.
Isoquants are also called „isoproduct curves‟. An Isoquant curve shows various
combinations of two input factors such as capital and labour, which yield the same level of
An Isoquant curve represents all such combinations which yield equal quantity of output;
any or every combination is a good combination for manufacturer. Since he prefers all
these combination equally, an Isoquant curve is also called „product indifference curve’.
Capital (in lakh)
Graph: Isoquant yielding 20,000 units of production
From the above figure, it shows the different combinations of input factors to yield an
output of 20,000 units of output. As the investment goes up, the no. of laborers can be
reduced. The combination of „A‟ shows 1 unit of capital and 20 units of labour to produce
say 20,000 units of output. All the above combinations if inputs can be plotted a graph, the
locus of all the possible combinations of inputs shows up Isoquant.
Features of an Isoquant:Downward sloping: These are downward sloping because, if one input increases, the other one reduces. There is
no question of increase in both the inputs to yield a given a given output. A degree of
substitution is assumed between the factors of production.
Convex to origin: Isoquants are convex to the origin. Because the input factors are not perfect substitutes. One
input factor can be substituted by other input factor in a diminishing marginal rate.
Do not intersect: These two Isoquants don‟t intersect, because each of these denote a particular level of
output, if the manufacturer wants to operate at a higher level of output, he has to switch
over to another Isoquant with a higher level of output & vice versa.
Do not touch the axes: The Isoquant touches neither X-axis nor Y-axis, as both inputs are required to produce a
Graph: Isoquants where inputs factors are s perfect substitutes…
IQ3 = 40,000 units
IQ2 = 30,000 units
IQ1 = 20,000 units
Graph: Isoquants where inputs factors are not perfect substitutes…
IQ3 = 40,000 units
IQ2 = 30,000 units
IQ1 =20,000 units
Marginal rate of technical substitutes: -
The marginal rate of technical substitution (MRTS) refers to the rate at which one
input factor is substituted with the other to attain a given level of output. In other words, the
lesser units of one input must be compensated by increasing amounts of another input to
produce the same level of output.
Change in Input / Change in Another output
∆K / ∆L
The below table shows the ratio of MRTS between the two input factors, say
capital and labour. 5 units of decrease in labour are compensated by an increase in 1 unit of
capital, resulting in a MRTS of 5:1.
Ratio of MRTS between capital and labour:
Capital (Rs. In lakh)
ISOCOSTS: It refers to that the cost curve that represents the combination of inputs that will cost the
producer the same amount of money. In other words, each isocost denotes a particular level
of total cost for a given level of production. If the level of production changes, the total cost
changes and thus the isocost curve moves upwards and vice versa.
The below figure shows three downward sloping straight line cost curves
(assuming that the input prices are fixed, no quantity discounts are available) each costing
Rs. 1.0 lakhs, Rs. 1.5 lakhs & Rs. 2.0 lakhs for the output levels of 20,000 , 30,000 and
40,000 units. (The total cost, as represented by each cost curve is calculated by
multiplying the quantity of each input factor with its respective price). Isocosts farther from
the origin, for given input costs, are associated with higher costs. Any change in input
prices changes the slope of isocost lines.
4 2 3 5 6 8 11 15 20
LEAST COST COMBINATION OF INPUTS
The manufacturer has to produce at lower costs to attain higher profits. The Iso costs and
Iso quants can be used to determine the input usage that minimizes the cost of production.
Where the slope of Iso quant is equal to that of iso cost, there lies the lowest point of cost of
production. This can be observed by superimposing the iso costs on iso product curves.
From the below figure, it is evident that the producer can with a total outlay of
Rs. 1.5 lakh, reach the highest Isoquant curve which is IQ2, of he wants to reach IQ3, he
has to bring additional resources, which is, let us assume, not possible he cant compromise
with IQ!, as it means lower output. There is no other input combination on IQ2 other than
point Q, which is cheaper than Rs. 1.5 lakh, so the obvious choice for the producer is Q
combination of inputs only on IQ2.
The points of tangency P, Q & R on each of the Isoquant curves represent the
least cost combination of inputs, yielding maximum level of output any output lower or
higher than this will result in higher cost of production.
Least cost combination
COBB- DOUGLAS production function:Cobb & Douglas put forth a production function relating output in American manufacturing
industries from 1899 to 1922 to labour & capital inputs. They used for the following
Where, P is total output.
L is the index of employment of labour in manufacturing.
C is the index of fixed capital in manufacturing.
The exponents „a‟ and „1-a‟ are the elasticities of production. These measure the percentage
response of output to percentage charges in labour and capital respectively.
The function estimated for the USA by Cobb & Douglas is
P = 1.01 L^0.75 C^0.25.
The production function shows that one percent change in labour input capital remaining
the same is associated with a 0.75 percentage change in output. Similarly one percentage
change in capital, labour remaining the same, is associated with a 0.25 percent change in
RETURNS TO SCALE & RETURNS TO FACTORS
Returns to scale refers to the returns enjoyed by the firm as a result of change in all the
inputs. It explains the behaviour of the returns when the inputs are changed simultaneously.
The returns to scale are governed by laws of returns to scale.
Law of returns to scale:
There are three laws of returns governing production function.
Law of increasing returns to scale.
Law of constant returns to scale.
Law of decreasing returns to scale.
Law of increasing returns to scale: This law states that the volume of output keeps on increasing with every increase in the
inputs. Where a given increase in inputs leads to a more than proportional increase in the
output, the law of increasing returns to scales is said to operate. We can introduce division
of labour and other technological means to increase production. Hence the total product
increases at an increasing rate.
Law of constant returns to scale: When the scope for division of labour gets restricted, the rate of increase in the total output
remains constant, the law of constant returns to scale is said to operate. This law states that
the rate of increase/decrease in volume of output is same to that of rate of increase/decrease
Law of decreasing returns to scale: Where the proportionate increase in the inputs does not lead to equivalent increase in
output, the output increases at a decreasing rate, the law of decreasing returns to scale is
said to operate. This results in higher average cost per unit.
These laws can be illustrated with an example of agricultural land. Take one
acre land, if you fill the land well with adequate bags of fertilizers and sow good quality
seed, the volume of output increases.
The following table illustrates:
% increase in Output
% increase Law of applicable.
Law of increasing
returns to scale.
Law of constant
returns to scale.
Law of decreasing
returns to scale.
From the above table, it is clear that with 1 unit of capital and 3 units of labour, the firm
produces 50 units of output.
When the inputs are doubled two units of capital and six units of labour, the
output has gone up to 120 units. (From 50 units to 120 units). Thus when inputs are
increased by 100 percent, the output has increased by 140% that is, output has increased by
more than double. This governed by law of increasing returns to scale.
When the inputs are further doubled that is to 4 units of capital and 12 units
of labour the output has gone up to 240 units (from 120 units to 240 units). Thus when
inputs are increased by 100%, the output has increased by 100%. That is output also has
doubled. This is governed by law of constant returns to scale.
when the inputs are further doubled, that is, to 8 units of capital and 24 units
of labour, the output has gone up to 360 units. (From 240 units to 360 units). Thus when
inputs are increased by 100%, which has increased only 50%. This is governed by law of
decreasing returns to scale.
RETURNS TO FACTORS:
It is also called factor productivities. Productivity is the ratio of output to the input. Factor
productivity refers to the short-run relationship of input and output.
The productivity of one unit of a factor of production will be equal to the output it can
Returns to factors refer to the output or return generated as a result of
change in one or more factors, keeping the other factors unchanged. Given a percentage of
increase or decrease in a particular factor such as labour,
The change in productivity can be measured in terms of:
Total productivity: The total output generated at varied levels of input of a particular factor (while other factors
remain constant), it is called total physical product.
Average productivity: The total physical product divided by the number units of that particular factor used yields
Marginal productivity: The marginal physical product is the additional output generated by adding an additional
unit of the factor under study, keeping the other factors constant.
The total physical product increases along with an increase in the inputs. However the rate
of increase is varied, not constant. The total physical product at first increases at an
increasing returns to scale, and later its rate of increasing declines because of the law of
decreasing returns to scale.
ECONOMIES AND DISECONOMIES OF SCALE: The economies of scale result because increase in the scale of production. Alfred marshal
divided the economies of scale into 2 groups
Internal economies refer to the economies in production costs which accrue to the firm
alone when it expands its output. The internal economies occur as a result of increase in the
scale of production.
These are types of internal economies:
Indivisibilities and automated machinery.
Economies of larger dimention.
Economies of research & research.
Marginal economies: An the firm expands, the firm needs qualified managerial personal to handle each of its
functions; - marketing, finance, production, human resources and others in a professional
way. Functional specialization ensures minimum wastage & lowers the cost of production
in the long-run.
Commercial economies: The transactions of buying and selling raw materials and other operating supplies such as
spares and so on will be rapid and the volume of each transaction also grows as the firm
grows. There could be cheaper savings in the procurement, transaction & storage costs. This
will lead to lower costs and increased profits.
Financial economies: There could be cheaper credit facilities from the financial institutions to meet the capital
expenditure or working capital requirements. A larger firm has larger assets to give security
to the financial institution which can consider reducing the rate of interest on the loans.
Technical economies: Increase in the scale of production follows when there is sophisticated technology available
and the firm is in a position to hire qualified technical man power to make use of there
could be substantial savings in the hiring of man power due to larger investments in the
technology. This lowers the cost per unit substantially.
Marketing economies: As the firm grows larger and larger. It can afford to maintain a full fledged marketing
department independently to handle the issues related to design of customer surveys,
advertising materials, and promotion campaign handling of sales and marketing staff,
renting of hoardings, launching a new product and so on. In the normal course, the firm
spends large amounts on issues in marketing and is still not sure of the results because these
are handled by different outride groups, on whom there is little control for the firm.
Risk bearing economies: As there is growth in the size of the firm, there is increase in the risk also. Sharing the risk
with the insurance companies is the risk priority for any firm. The firm can insure its
machinery and other assets against the hazards of fire, theft & other risks, the large firms
can spread their risk so that they do not keep all their eggs in one basket. They purchase raw
material from different sources.
Indivisibilities and automated machinery: -
To manufacture goods, a plant of certain maximum capacity is required whether the firm
would like to produce and sell at the full capacity or not, because the production is lesser,
the firm can‟t hire half the manager or half the telephone. The minimum quality can be
produced in the firm. A firm producing below such minimum quantity will have to bear
Economies of larger dimention: Large scale production is required to take advantage of bigger size plant and equipment. For
example, the cost of a 1,00,000 units capacity plant will not be double that of 50,000 units
capacity plant like wise, the cost of a 10,000 tonnes oil tanker will not be double that of a
5,000 tonnes oil tanker.
Economies of research & development: Large organizations such as Dr. Reddy‟s labs, Hindustan lever spend heavily on research
and development and bring out several innovative products, only such firms with strong
research & development base can cope with competition globally.
These refer to all the firms in the industry because of growth of the industry as a whole or
because of growth of auxillary industries. External economies benefit all the firms in the
industry as the industry expands. This will lead to lowering the cost of production and
thereby increasing the profitability.
The external economies are grouped to 3 types.
Economies of concentration.
Economies of research and development.
Economies of welfare.
Economies of concentration: All the firms are located one place. Than there is better infrastructure in terms of
Transportation facilities such as railway lines.
Banking & communication facilities.
Availability of skilled labour.
Economies of research and development: All the firms can pool resources together to finance research and development activities and
thus share the benefits of research. There could be a common facility to share journals,
news papers & other valuable reference material of common interest.
Economies of welfare: There could be common facilities such as
Schools and colleges.
Those are commonly used by employees
DISECONOMIES OF SCALE
Diseconomies are mostly managerial in nature. Problems of planning,
coordination communication and control may become increasingly complex as the firm
grows in size resulting in increasing average cost per unit. Sometimes the firm may also
Diseconomies of scale are said to result when an increase in the scale of
production leads to a higher cost per unit.
Ex:- All inputs an increase by 10%, but production increased by 5%, it is called
As the firm grows layer, it may need to seek permission to operate in foreign markets. Any
degree of bureaucratic inefficiency will affect the firm‟s profitability and this leads to
diseconomies of scale.
When a firm is not in a position to respond to the business environment in which
operates diseconomies are bound to result in. modern organizations have started delaying
their organizations to make them flat and lean to overcome the problems of diseconomies.
Results from regression show that there were no states of misfit between the levels of both
manufacturing practice sets/areas. This means that there are no significant differences in
performance that may be tested for matching interaction. However, subgroup analysis
provides greater detail on why there might not be any misfits (i.e. state of fit), by illustrating
that when grouping by plant type (high/world class performer, HP, and standard performer,
SP), the slight lack of significant difference in the correlation between MS and TM was in
favour of HP. The implementation levels of MS-TM found were not significantly different,
showing for HP slightly higher levels for both practices (+&+) than for SP, with slightly
lower values in both cases (- & -). Therefore, it seems that both groups might perform
equally well, due not to interaction but to the presence of a state of MS-TM fit alone. A state
of fit such as this, known as selection or congruency, would be the reason for there being no
significant matching interaction originally.