Topic 2: The relationship between Microeconomics and Management - PowerPoint PPT Presentation

Topic 2: The relationship between Microeconomics and Management Accounting Ana Mª Arias Alvarez University of Oviedo Department of Accounting amarias@uniovi.es School of Business Administration Course: Financial Statement Analysis and Management Control Bachelor’s Degree in Economics Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare

2.1. Basic concepts of the theories of production and costs: a practical approach. 2.2. Necessary information to achieve scale, technical and allocative efficiency. 2.3. Determining the costs of products and services. Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 2/17

2.1: BASIC CONCEPTS OF THE THEORIES OF PRODUCTION AND COSTS: A PRACTICAL APPROACH. THE PRODUCTION FUNCTION Q Q L L 1 L 2 L 3 Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 3/17

The law of diminishing returns states that as the use of an input increases (with other inputs fixed), point will eventually be reached at which the resulting additions to outputs decrease. Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 4/17

TC Short ‐ run costs € VC FC Q 1 Q Q ’ Q 2 Q ’ 1 2 Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 5/17

MC ATC € AVC AFC Q Q ’ Q 0 0 Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 6/17

Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 7/17

Task: try to solve problem 2.1. Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 8/17

Q If the fixed input is divisible: TP L L 0 Q AP L L 0 MP Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 9/17

€ TC TVC TFC Q L 0 € ATC MC AVC AFC AVC = MC Q L 0 Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 10/17

2.2: NECESSARY INFORMATION TO ACHIEVE SCALE, TECHNICAL AND ALLOCATIVE EFFICIENCY. Scale efficiency means that firms are of the appropriate size. Profit is at a maximum where marginal revenue equals marginal cost. If the firm is operating under perfect competition, that is achived if the firm is operating at the minimum of its long ‐ run average cost curve. Technical efficiency : A technically efficient position is achieved when the maximum possible improvement in outcome is obtained from a set of resource inputs. An intervention is technically inefficient if the same (or greater) outcome could be produced with less of one type of input. Allocative efficiency describes the use of inputs in the proportion that minimizes the cost of production, given input prices. Economic efficiency comprises both technical efficiency and allocative efficiency. Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 11/17

Scale efficiency implies that the firm is operating at the most productive scale size. Technical efficiency is represented by isoquants. Allocative efficiency is represented by the expansion path. To put it briefly, a company is efficient when marginal revenue equals marginal cost , and when the adequate plant size and combination of inputs have been chosen in order to minimize costs. Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 12/17

K C 3 r Expansion Path C 2 r The expansion path describes the combinations C 1 of labour and capital that the firm should r choose to minimize costs for every output level. D C 0 It shows the lowest long ‐ run total cost of r producing each level of output. C B A Q 3 Q 2 Q 1 Q 0 L C 0 C 1 C 2 C 3 w w w w Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 13/17

The relationship between short ‐ run and long ‐ run cost: €/unit SAC SAC SMC SAC SAC SAC LAC SAC SAC SAC AC 0 AC 2 AC 1 Q Q 0 Q 3 Q 2 Q 1 Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 14/17

If there are only 3 choices of plant size in the long run: € TC 1 TC 2 TC 3 C B A Q Q 2 Q 1 Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 15/17

Task: try to solve problem 2.2. Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 16/17

2.3: DETERMINING THE COSTS OF PRODUCTS AND SERVICES. How can cost information be of assistance in providing answers to questions about the consequences of following particular courses of action: 1) Make or buy decisions: relevant costs should be taken into account (those expected future costs that differ among alternative courses of action). 2) Determining the long ‐ run optimum production plan: the difference between revenues and variable costs should be maximized taking into account technical and market restrictions. 3) How many units must be sold to break ‐ even? Costs should be separated into their fixed and variable elements in order to calculate break ‐ even point. 4) Pricing decisions: should a company sell a product at a price below total cost? Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare 17/17