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Isoquants ridge lines for Managerial Economics Mcom Delhi University

Isoquants ridge lines for Managerial Economics Mcom Delhi University

Isoquants ridge lines for Managerial Economics Mcom Delhi University

In economics, the economic region of production is an offshoot of the theory of production function with two variables. It is a cost-oriented theory which defines the region in which the optimal factor combination will lie. It serves as a map of the region of optimal production.

Isoquants ridge lines for Managerial Economics Mcom Delhi University

Part A: Firm and Market

Unit I: Demand and The Firm: Consumer Behaviour: Cardinal and ordinal approaches to the derivation

of the demand function. Revealed preference approach. Theory of attributes – Demand for consumer

durables. Firm Theory: Objectives of the firm; Theory of the growth of the firm: Marris and Penrose.

Unit II: Production and Cost: Production: Law of variable proportion. Returns to scale. Production

function: Concept of productivity and technology. Producer’s Equilibrium. Isoquants ridge lines, Isoclines,

Isocost lines.

Cost function: Classification of costs, Short run cost functions, Relationship between return to scale and

return to a factor, Long run cost functions.

Unit III: Market and Pricing: Market forms: AR-MR. Price taker; Monopoly power. Oligopolistic

behavior: Cournot and Stackelberg models. Factor Pricing: Demand and supply of factors of production.

Euler’s theorem.

Part B: Macroeconomic environment

Unit IV: Product and Asset Market Equilibrium: Product Market: Derivation of IS function. Demand

for real cash balances: Tobin’s Portfolio theory. Endogenous money supply and Asset market equilibrium. Derivation of real LM function. Real IS-LM framework.

Unit V: Aggregate Demand and Aggregate Supply: Modern aggregate demand function. Demand

Management. Philips Curve. Aggregate supply and the price level.

Isoquants ridge lines for Managerial Economics Mcom Delhi University

An isoquant is elliptical or oval-shaped as shown in Fig. 5 but its area of rational operation lies between the ridge lines. The firm will produce only in those segments of isoquants which are convex to the origin and lie between the ridge lines.

The ridge lines are the locus of points of isoquants where the marginal products (MP) of factors are zero. The upper ridge line implies zero MP of capital and the lower ridge line implies zero MP of labour. Production techniques are only efficient inside the ridge lines. The marginal products of factors are negative and the methods of production are inefficient outside the ridge lines.

Isoquants ridge lines for Managerial Economics Mcom Delhi University

Isoquants ridge lines for Managerial Economics Mcom Delhi University

In Fig. 5, curves О A and OB are the ridge lines on the oval-shaped isoquants and in between these lines on points G, J, L and N and H, К, M and P economically feasible units of capital and labour can be employed to produce 100, 200, 300 and 400 units of the product.

For example, ОТ units of labour and ST units of the capital can produce 100 units of the prod­uct, but the same output can be obtained by using the same quantity of labour ОТ and less quantity of capital VT. Thus only an unwise producer will produce in the dotted region of the iso-quant 100.

The dotted segments of isoquants form the uneconomic regions of production because they require an increase in the use of both factors with no corresponding in­crease in output. If points G, J, L, N, H, К, M and P are connected with the lines OA and OB, they are the ridge lines. On both sides of the ridge lines, it is uneconomic for the firm to produce while it is economically feasible to produce inside the ridge lines.

Recommended Mcom Notes

M. Com. (Part-I)

M. Com. (Part-II)

Part A Firm and Market for Managerial Economics Mcom Delhi University

Use following books for M.COM

Isoquants ridge lines for Managerial Economics Mcom Delhi University

Managerial economics is the “application of the economic concepts and economic analysis to the problems of formulating rational managerial decisions”. It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis, correlation and calculus If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm’s objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions, and other computational methods.

Managerial decision areas include:

  • assessment of investible funds
  • selecting business area
  • choice of product
  • determining optimum output
  • sales promotion.

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

  • Risk analysis – various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.
  • Production analysis – microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm’s cost function.
  • Pricing analysis – microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
  • Capital budgeting – Investment theory is used to examine a firm’s capital purchasing decisions.

At universities, the subject is taught primarily to advanced undergraduates and graduate business students. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics.

Isoquants ridge lines for Managerial Economics Mcom Delhi University

Recommended read:

Part A Firm and Market for Managerial Economics Mcom Delhi University
Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Isoquants ridge lines for Managerial Economics Mcom Delhi University

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