Managerial  

Economics
MBAFT 6103

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 Today
Four Special Topics
•  Economies of Scope
•  Learning Curve
•  Sales Maximization versus Profit Maximization

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 Economies  of  Scope

If the total cost of producing two goods X and Y by a
single firm is less that the cost of producing X and Y
separately, then the production of X and Y is
characterized by economies of scope

i.e., economies of scope exists if

TC(X,Y) < TC(X) + TC(Y),
Where TC(X,Y) is the total cost of jointly producing X
and Y.

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 Economies  of  Scope

Measured by the ratio

(TC(X) + TC(Y) – T(X,Y))/(TC(X) + TC(Y))

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 Economies  of  Scope

Measured by the ratio

(TC(X) + TC(Y) – T(X,Y))/(TC(X) + TC(Y))

Examples?

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Economies  of  Scope

Arises because of complementarity

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 Learning  Curve

Learning curve for a business tells us about the
relationship that exists between average cost of
production and the cumulative quantity produced by
that business.
 Learning  Curve

Average  Cost

Cumulative  Output
 Learning  Curve

•  Can also be expressed as man-hour per unit of
production as a function of cumulative output
yx = ax-b
B where

x = cumulative production
yx = man-hrs. to produce xth unit
a = hrs. to produce first unit
b = a parameter related to the percentage
associated with the Learning Curve
Learning  Curve

Why do we observe this?

 Learning  Curve

•  Innovation and improvements in operations

•  Standardization

•  Product Re-design

•  Increased labor efficiency

•  Learning from shared experience

Read both topics from Salvatore.

 Sales  Maximization

•  Baumol’s model
•  Applicable for big firms
•  Maximize total revenue instead of total profit

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 Sales  Maximization

•  Sometimes large firms do sales (revenue)
maximization instead of profit maximization
•  Outcome? Sales maximization means more output
and higher revenue.
•  Example: P = 10 – 0.1Q. TC = 70 + 2Q
Profit maximization gives, Q =40, P=6, π = 90
Revenue max gives, Q =50, P=5, π = 80
•  Why do Sales Maximization instead of profit
maximization?

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