prepare a brief, with the aid of diagrams how can knowledge of returns to variable inputs assist in decision-making in business
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I don't understand what is meant by
returns to variable inputs. If you can expalin, I can do the rest.
These sites should help you.
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=gls&c=dsp&k=variable+input
http://en.wikipedia.org/wiki/Production_theory_basics
hoiw can variable inputs affect business
To prepare a brief with the aid of diagrams on how knowledge of returns to variable inputs can assist in decision-making in business, follow these steps:
1. Understand the concept of returns to variable inputs:
Returns to variable inputs is an economic concept that examines the relationship between the quantity of inputs used in production and the resulting output. It helps businesses understand how changes in input levels impact output, profitability, and costs.
2. Identify the key variable inputs:
Variable inputs are those that can be adjusted or varied in the short run, such as labor, raw materials, and energy. Identify which inputs are relevant to the decision-making process in your business context.
3. Study the production function:
The production function illustrates the relationship between inputs and output. It shows how changes in variable inputs affect the level of production. The most common production function is the Cobb-Douglas production function, which has a mathematical form of Q = f(K,L), where Q represents output, K denotes capital input, and L represents labor input.
4. Analyze the law of diminishing returns:
The law of diminishing returns states that as more and more units of a variable input are added to fixed inputs (like capital), the marginal product of the variable input will eventually decrease. This means that at a certain point, adding more of a variable input will result in smaller increases in output.
5. Create diagrams to explain returns to variable inputs:
Draw diagrams to visually represent the relationship between input levels and output. One common diagram is the production function curve, which shows the output level at different levels of inputs. It demonstrates how output changes as one input is varied while others are held constant.
6. Explain decision-making implications:
Using the diagrams, explain how knowledge of returns to variable inputs can assist in decision-making:
- Optimal input levels: By understanding the production function, businesses can determine the optimal combination of inputs that maximizes output and minimizes costs.
- Capacity planning: Knowledge of returns to variable inputs helps in determining the capacity of the business by identifying the point where diminishing returns set in. It enables businesses to avoid overutilizing resources and optimize production.
- Cost analysis: Understanding returns to variable inputs helps businesses analyze the costs associated with different input levels. They can identify the point where additional inputs become less economically viable, leading to higher costs.
Remember to use labels and appropriate annotations in your diagrams to clearly illustrate the concepts and their implications.