A study by the Computer Manufacturers Association of America analyzed the significant increase in the usage of computers by business firms in the United States over the last two decades. In terms of production theory, one might say the computer--labor ratio has risen. Using production theory, provide a rationale for this trend. Given the falling prices of business computers, what types of changes in business offices would you expect to have occurred?
Business will "hire" a productive resource if the Value of the Marginal Product (VMP) exceeds the Marginal Cost of the resource. A computer is a piece of capital that helps the business produce some kind of output. So, the VMP of a computer goes up if:
1) the price of the business's output goes up, or
2) the computer becomes more productive. (Certainly true as computer speeds have become much faster, memory and disk drive capacities have grown, etc.) or:
3) The computer requires less resources to run. (While the electricity needed to run a computer probably hasn't changed, the number of people needed to service the computer has certainly fallen. )
The marginal cost of computer certainly has fallen, as one can buy a preaty decent system for about $1000. (15 years ago, I spend $2000+ for the then state of the art home computer.)
Now compare this to labor. Has labor become more productive? (probably a bit) Has the MC of the worker changed (probably not).
So, this suggests business, to the extent possible, will substitute computers for labor. (Yes, it may mean hiring mor computer support people. However, overall, the amount of workers needed will almost certainly diminish in relation to the amount of computer equipment purchased.)
I hope this helps.
The MorTex Company assembles garments entirely by hand even though a textile machine exists that can assemble garments faster than a human can. Workers cost $50 per day, and each additional laborer can produce 200 more units per day (i.e., marginal product is constant and equal to 200). Installation of the first textile machine on the assembly line will increase output by 1800 units daily. Currently the firm assembles 5400 units per day.
a) The financial analysis department at MorTex estimates that the price of a textile machine is $600 per day. Can management reduce the cost of assembling 5400 units per day by purchasing a textile machine and using less labor? Why or Why not?
b) The Textile Workers of America is planning to strike for higher wages. Management predicts that if the strike is successful, the cost of labor will increase to $100 per day. If the strike is successful, how would this affect the decision in part (a) to purchase a textile machine? Explain.
Production theory is a branch of economics that analyzes the relationship between inputs and outputs in the production process. One of the central concepts in production theory is the concept of the production function, which expresses the relationship between the inputs used in production (such as labor, capital, and technology) and the resulting output.
In the context of the study mentioned, the increasing usage of computers by business firms indicates a rise in the computer-labor ratio. This means that businesses are using a greater proportion of computers relative to labor in their production process.
The rationale for this trend can be explained using the concept of capital substitution. According to production theory, firms seek to maximize their output by using a combination of inputs that minimizes costs. As the price of business computers falls, they become more affordable and attractive relative to labor. Businesses can substitute computers for labor to increase productivity and reduce costs.
There are several changes in business offices that one might expect to have occurred as a result of this trend:
1. Automation: With the increased usage of computers, manual and repetitive tasks previously performed by human labor could have been automated. This could include tasks like data entry, calculations, inventory management, and more.
2. Efficiency: Computers enable businesses to streamline processes and increase efficiency. This could involve using software applications for project management, customer relationship management, accounting, and other business operations.
3. Communication and collaboration: Computer technology has also revolutionized communication and collaboration in business offices. With the advent of email, video conferencing, and collaborative tools, businesses can now connect and work together more effectively, regardless of physical distance.
4. Flexibility and remote work: The availability of computers has allowed for greater flexibility in the workplace. With the use of laptops and internet connectivity, employees can work remotely and access business systems from any location.
Overall, the falling prices of business computers have led to increased usage and a rise in the computer-labor ratio. This, in turn, has prompted changes in business offices such as automation, increased efficiency, improved communication and collaboration, and the adoption of flexible work practices.