Drive Productivity through Knowledge & Innovation

JWI 515, Managerial Economics, Week4 Summary, 11/4/12

This week we learned to recognize key economic indicators and apply economic concepts to analyze optimum production strategies and controls. The concepts we learned this week further clarify and refine my understanding of the underlying economic principles and help take my production management skills to the next level.

I. Readings
Hirschey, Chapter 7: Production Analysis and Compensation Policy
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Fortune500 CEOs make a minimum of 5M$ a year and above.
CEOs must be made to earn their pay and not just preside over a firm that is in trouble
Some CEOs do earn their pay - what they do and the returns they achieve for shareholders justify their high compensation in terms of salary, bonus, stock options, stocks

II. Week 4, Lecture 1: The Productivity Imperative
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1. Productivity
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Productivity - a real economic measure that managers use to make their plant, office, or company more effective and efficient.
Productivity growth - rate the output increases per unit of input is a fundamental economic indicator
Rising productivity - from smart use of labor & capital, product innovation, capital funding - improves economic and social well-being of an economy.
When productivity grows everybody makes more money.

2. Production Process
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Create something of exchange value by using optimal combination of input components together with technology and labor.
Managers should correlate Inputs vs Revenue, Cost, Output, other resources

3. Production function
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Used to assess maximum output from a given level of input.
Goal is to ensure production function is changed as needed to achieve maximum production and profit potential.
Discrete production function - has a set combination of inputs that lead to a specific output.
Continuous production function - inputs varied in an unbroken fashion.

4. Production Scaling - up or down
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(a) Return to scale: All inputs proportionally changed and output is assessed
(b) Increasing return to scale: more is produced with less; target zone; proportional increase in output is greater than proportional increase in input
(c) Constant return to scale: same proportional change in outputs and inputs
(d) Decreasing return to scale: output increasing at a slower rate than proportional change in inputs
(e) Return to factor: One input is changed and output is assessed

5. Total Product = Total amount of output produced
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Average Product = Total product/# input units used
Marginal Product = change in output from a one-unit increase or decrease in input

6. Marginal product curve
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Increasing returns: output increases with more labor
Diminishing returns: at one point, adding more workers causes efficiency to fall (but total product can still increase)
Negative returns: output decreases with more inputs

7. Marginal product vs Total Product
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So long as Marginal product is positive, Total product will increase with each added input unit

8. Isoquant & Isocost curves
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Isoquant- constant level of output quantity vs various combos of inputs
Isocost - constant level of Total cost vs various combos of inputs ; to be technically efficient, use lowest cost combinations of inputs
Overlay Isoquant with Isocost => pick inputs; figure out path for production expansion or contraction

9. Production Cost control
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Marginal rate of technical substitution (MRTS) - How much of one input can be substituted for a constant output
eg. substitute machinery; change fuels

10. Marginal Revenue Product (MRP) & Marginal Resource Cost (MRC)
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MRP - Revenue generated from one additional unit of input
MRC - Cost of adding one additional unit of input

11. Production Manager's job
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Determine Product function
Determine right combination of inputs with lowest cost

eg. Straw berry season
Inputs - Labor
Output - pints of strawberries
Increase labor to get berries, increase marginal product
Crowded field of workers begin to step on each other's feet
Farmer has to optimize labor input to maximize output of berries
=> figure out the production function (ie the yield model)

III. Week 4 DQ1: The Productivity Imperative
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Bureau of Labor Statistics website (http://www.bls.gov/) - learn more about labor productivity and costs.
Determined the current productivity results for the non-farming business sector and the manufacturing sector.
Discussed recent productivity and cost trends to make predictions for the future.

IV. Week4 Assignment: US Economy
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Key Point:
Knowledge & innovation have major impact on economic growth and are the basis of increasing international competition.

Changing economic forces and underpinnings of US adaptability
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(i) Low wage competition: from foreign countries; Mexico & China intensified it
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(ii) Technology acceleration: starting 1960s
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- new high tech industries grew; located in cities with skilled workforce & university research
- Technological capability is key to competitiveness in open & integrated world
(iii) Continual pervasive pursuit of material success
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- key driver of economic system
(iv) US financial system
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- essential element in business startups
(v) Triple helix
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universities, governments & businesses
Universities: sources of knowledge & education + industrially valuable technical skills, innovation, entrepreneurship
Businesses: they follow open innovation system; actively pursue innovations outside immediate industrial context
Governments: Taxes, Regulations & Public policy
(vi) Knowledge & innovation
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- University industry linkage (UIL) depends on the Innovation system
- extent and nature of knowledge economy differs among nations
(vii) Financial system
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Very important element in firm's success in knowledge economy
Startup and growth of a firm based in knowledge economy depends on a financial system that can provide it adequate funding
Traditional firms:
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Firm borrows with fixed assets as security for a loan
Firm's book value guides stock valuation
Traditional Banking system - borrow from depositors, charge interest rates, lend to borrowers
Knowledge economy firms:
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Firm borrows against knowledge assets - Difficult to value
Traditional Banking system (borrow from depositors, charge interest rates, lend to borrowers) severely limited
Supplementary financial activities
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Disintermediation - firm obtains funding directly from investors & new financial intermediaries
VCs, angel investors, investment bankers, PE funds, bought deals, IPOs
Gap in availability of such funding is a key contributor to relative productivity growth among nations

(viii) 2007-2009 Financial & Economic Crisis

(A) Causes:
(i) Lack of adequate government regulation
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 - allowed mortgage bankers to arrange house financing geared tp skyrocketing real estate prices
(ii) Subprime mortgages
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 - enabled households to borrow more than they could afford to repay
 - institutions combined these mortgages to create collateralized debt obligations (CDOs); securitization process distributed the tainted assets worldwide
 - CDOs insured through credit default swaps
(iii) Real estate prices started to fall
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 - financing process stopped
 - many banks held CDOs worth much less than their face value
 - insurance companies did not have adequate funding to meet their commitments

(B) President Obama's Actions & Reforms
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 - Assisted financial institutions through loans, purchase of shares, debt guarantees, purchase of non-performing loans
 - Monetary policy: lower interest rates; expand money supply
 - Fiscal policy: tax cuts; huge increases in expenditures; deficit > 10% GDP
 - Assisted Housing & Automobile sectors financially

(C) Open issue - Current Recession
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How long would it last ? What does it impact? What results will come from govt policies ? eg. Rapid inflation could occur.

Dr DP