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INDEX

No. 1 1.1 1.2

Contents Organization of production Production function Organization of production function with one variable inputs Organization of production function with two variable inputs Production Isoquoants Economic Region of Production Empirical Production Function Returns to scale A Practical illustration of long run returns to scale Estimated ln Q , ln K and ln L of SAIL co. Assumptions to Empirical Production Function Difficulties to Empirical Production Function Company Profile(SAIL) Production Detail Comparison between Ideal and Actual production Curve Descriptive Data Regression Analysis Executive Summary Bibliography

Page no. 01 02

03

1.3

1.4 1.5 2 2.1 2.2 2.3 2.4 2.5 3 3.1 3.2 3.3 3.4 3.5 4

04 04 05 07 08 09 10-11 11 11 12 13 14 15 16 17 17

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1.

ORGANIZATION OF PRODUCTION:

Production refers to the transformation of inputs into outputs of goods and services. For example, IBM hires workers to use machinery, parts, and raw materials in factories to produce personal computers. The output of a firm can either be a final commodity (such as personal computer) or an intermediate product, such as semiconductor (which are used in the production of computers and other goods). The output can also be a service rather than goods. Examples of services are education, medicine, banking, communication, transportation, and many others. Inputs are the resources used in the production of goods and services. As a convenient way to organize the discussion, inputs are classified in to labor (including entrepreneurial talent), capital and land or natural resources. Each of these broad categories, however include a great variety of the basic input. For example, labor includes bus drivers, assembly line worker, accountants, lawyers, doctors, scientists, and many others. Inputs are also classified as fixed inputs and variable inputs. Like....

FIXED INPUTS: fixed inputs are those that cannot be readily changed during the time period under consideration, except perhaps at very great expense. Examples of fixed inputs are the
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firms plant and specialized equipment (it takes several years for IBM to build a new factory to produce computer chips to go into its computer). VARIALBLE INPUTS: variable inputs are those that can be varied easily and on very short notice. Examples of variable inputs are most material and unskilled labour. The time period during which at least one inputs is fixed is called the SHORT RUN, while the time period when all inputs are variable is called the LONG RUN. 1.1 PRODUCTION FUNCTION: Production theory involves the concept of production function. A production function is an equation, table, or graph showing the maximum output of a commodity that a firm can produce per period of time with each set of inputs. Both inputs and outputs are measured in physical rather than in monetary units. Technology is assumed to remain constant during the period of the analysis. We assume that a firm produces only one type of output with two inputs, labor (L) and capital (K). Thus, the general equation of this simple production function is....

Q= f (L, K) From the above function, it can be said that quantity of output is a function of, depends on the quantity of labor and capital used in production. Where, output means to the number of units of the commodity produced. For example number of car produced. Labor means to the number of workers employed. Capital means to the amount of the equipment used in the production.

1.2 The production function with one variable input In this section, we present the theory of production when only one input is variable. Thus, we are in the short run. We begin by defining total, the average, and the marginal product of the variable input and deriving from this the output elasticity of the variable input.

MANAGERIAL ECONOMICS

Figure 2-1 No. of Labour Output Marginal Product labour 0 1 2 3 4 5 6 0 3 8 12 14 14 12 3 5 4 2 0 -2 3 4 4 3.5 2.8 2 Avg product of Output of Labour Elasticity Labour 1 1.25 1 0.57 0 -1 of

1.3 THE PRODUCTION FUNCTION WITH TWO VARIABLE INPUTS We now examine the production function when there are two variable inputs. This can be represented graphically by isoquants. In this section we define isoquants and discuss their characteristics. Isoquants will then be used in Section 6-5 to develop the conditions for the efficient combination of inputs in production. 1.4 Production Isoquants An Isoquants shows the various combinations for two inputs (say, labor and capital) that the firm can use to produce a specific level of output. A higher isoquant refers to a larger output, while a lower isoquant refers to a smaller output. Isoquants can be derived from Table 6-4, which repeats the production function of Table6-1 with lines connecting all the labor-capital combinations that can be used to produce a specific level of output. For example, the table shows that 12 units of output (that is, 12Q) can be produced with 1 unit of capital (that is, 1K) and 3 units of labor (that is, 3L) or with 1K and 6L.6 The output of 12Q can be produced with 1L and 5K. These are shown by the lowest isoquant in Figure 6-6. The isoquants is smooth on the assumption that labor and capital are continuously divisible. Table 6-4 also shows that 28Q can be produced with 2K and 3L, 2K and 6L, 2L and 4K, and 2L and 5K (the second isoquant marked
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28Q in Figure 6-6). The table also shows the various combinations of L and K that can be used to produce 36Q and 40Q (shown by the top two isoquants in the figure). Note that to produce a greater output, more labor, more capital, or more of both labor and capital are required. 1.5 Economic Region of Production While the isoquants in Figure 6-6 (repeated in Figure 6-7) have positively sloped portions, these portions are irrelevant. That is, the firm would not operate on the positively sloped portion of an isoquants because it could produce the same level of output with less capital and less labor. For example, the firm would not produce 36Q at point U in following figure

Figure 3-1 : Production Function with Two Variable Inputs.

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Fig.3-2 : Isoquants: From the table, it can be seen that 12Q can be produced with 1L and 5K, 1L and 4K, 3L and 1K or 6L and 1K. Source:

http://www.swlearning.com/economics/salvatore/salvatore5e/ch01.pdf

Fig.3-3: The Relevant Portion of Isoquants. The economic region is given by the negatively sloped segment of isoquants between ridge lines OVI and OZI. The firm will not produce in the positively sloped portion of the isoquants because it could produce the same level of

MANAGERIAL ECONOMICS

output

with

both

less

labour

and

less

capital.

Source:

http://www.swlearning.com/economics/salvatore/salvatore5e/ch01.pdf

2. Cobb-Douglas : Empirical Production Function

The production function most commonly used in empirical estimation is the power function of the form that is

Q = ALaKb, where: Q = total production (the monetary value of all goods produced in a year) L = labour input K = capital input A = constant a and b are the parameters of labor and capital respectively. These values are constants determined by available technology. If, a + b = 1, the production function has constant returns to scale . That is, if L and K are each increased by 20%, Q increases by 20%.

If a + b < 1,

MANAGERIAL ECONOMICS

returns to scale are decreasing. That is if L and K are each increased by 20%, Q increases by 10%.

if a+b>1 returns to scale are increasing. That is if L and K are each increased by 20%, Q increases by 40%. Assuming perfect competition, a and b can be shown to be labor and capital's share of output.

2.1 Returns to Scale

Returns to scale refers to the degree by which output changes as result of a given change in the quantity of all inputs used in production. There are three types of returns to scale: constant, increasing and decreasing. If the quantity of all inputs used in production is increased by a given proportion, we have constant returns to scale if output increases in the same proportion; increasing returns to scale if output increases by a greater proportion; and decreasing returns to scale if output increases by smaller proportion. Starting with the general production function Q = f (L, K) We multiply L and K by h, and Q increases by 1, as Q = f (hL, hK) We have constant, increasing or decreasing returns to scale, respectively, depending on whether = h, > h, or < h.

MANAGERIAL ECONOMICS

1. Fig.5-1: Constant, Increasing and Decreasing Returns to Scale. In all three panels of this figure we start with the firm using 3L and 3K and producing 100Q. By doubling inputs to 6L and 6K, the left panel shows that output also doubles to 200Q, so that we have constant returns to scale; the centre panel shows that output triples to 300Q, so that we have increasing returns to scale; while the right panel shows that output only increases to 150Q, so that we have decreasing returns to scale. Source:

http://www.swlearning.com/economics/salvatore/salvatore5e/ch01.pdf

2.2 A Practical illustration of long run returns to scale

Here if we assume all other factors affecting the production as constant except Labour and capital then we can have the following data of SAIL co. Year Q (million tons) K Cr.) (in L % % Returns to scale

increase Increase in INPUT in OUTPUT 2.65 9.67 6.88 3.73 5.05 5.33 4.46 -4.30 -1.12

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

7.126 7.315 8.029 8.581 8.901 9.351 9.849 10.288 9.846 9.736

18265 17045 16542 15271 20064 21782 25476 28450 34552 43752

150832 147601 137496 131910 126857 138211 132973 128804 121295 116950

-1.11 -4.90 -5.87 -17.61 0.20 -10.38 -2.41 -13.64 -15.10

Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing

2.3 Properties of Cobb-Douglas production function The marginal product of capital and the marginal product of labour depend on both the quantity of capital and the quantity of labour used in production. The exponents of K and L (a and b) represent, respectively, the output elasticity of labour and capital (Ek and El), and the sum of the exponents (that is a + b) measures the returns
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to scale. If a + b = 1, we have constant returns to scale, if a + b > 1, we have increasing returns to scale, and if a + b < 1, we have decreasing returns to scale. Cobb-Douglas production function can easily be extended to deal with more than two inputs (say, capital, labour,). Cobb-Douglas production function can be estimate by regression analysis by transforming it into which is linear in the logarithms. ln Q = ln A + a ln K + b ln L 2.4 Estimated ln Q ln K and ln L of SAIL co.

Year

Q (million tons)

K Cr.)

(in L

ln (Q)

ln (K)

ln (L)

2000-01

7.126

18265

150832

1.96375007 9.81274194

11.9239219

2001-02

7.315

17045

147601

1.98992703 9.74361218

11.9022680

2002-03

8.029

16542

137496

2.08305999 9.71365788

11.8313501

2003-04

8.581

15271

131910

2.14955046 9.63371088

11.7898752

2004-05

8.901

20064

126857

2.18616363 9.90668244

11.7508157

2005-06

9.351

21782

138211

2.23548329 9.98883922

11.8365368

2006-07

9.849

25476

132973

2.28736993 10.14549211 11.7979014

2007-08

10.288

28450

128804

2.33097817 10.25590344 11.7660471

2008-09

9.846

34552

121295

2.28706528 10.45022071 11.7059809

2009-10

9.736

43752

116950

2.27583036 10.68629261 11.6695018

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The estimation have been performed with the help of MS EXCEL using ln function. 2.5 Assumptions: 1. If either labor or capital vanishes, then so will production. 2. The marginal productivity of labor is proportional to the amount of production per unit of labor. 3. The marginal productivity of capital is proportional to the amount of production per unit of Capital. 2.6 Difficulties: 1. If the firm produces a number of different products, output may have to be measured in monetary rather than in physical units, and this will require deflating the value of output by the price index in time-series analysis or adjusting for price differences for firms and industries located in different regions in cross-sectional analysis. 2. Only the capital consumed in the production of the output should be counted, ideally. Since machinery and equipment are of different types and ages and productivities, however, the total stock of capital in existence has to be instead. 3. In time-series analysis a time trend is also usually included to take into consideration technological changes over time, while in cross-sectional analysis we must ascertain that all firms of industries use the same technology.

3. Company Profile SAIL traces its origin to the formative years of an emerging nation - India. After independence the builders of modern India worked with a vision - to lay the infrastructure for rapid industrialisaton of the country. The steel sector was to propel the economic growth. Hindustan Steel Private Limited was set up on January 19, 1954.

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Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets. SAIL is also among the five Maharatnas of the country's Central Public Sector Enterprises.

SAIL manufactures and sells a broad range of steel products, including hot and cold rolled sheets and coils, galvanised sheets, electrical sheets, structurals, railway products, plates, bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company's iron ore, limestone and dolomite mines. The company has the distinction of being Indias second largest producer of iron ore and of having the countrys second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making.

SAIL's wide range of long and flat steel products are much in demand in the domestic as well as the international market. This vital responsibility is carried out by SAIL's own Central Marketing Organisation (CMO) that transacts business through its network of 37 Branch Sales Offices spread across the four regions, 25 Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact Offices. CMOs domestic marketing effort is supplemented by its ever widening network of rural dealers who meet the demands of the smallest customers in the remotest corners of the country. With the total number of dealers over 2000 , SAIL's wide marketing spread ensures availability of quality steel in virtually all the districts of the country. SAIL's International Trade Division ( ITD), in New Delhi- an ISO 9001:2000 accredited unit of CMO, undertakes exports of Mild Steel products and Pig Iron from SAILs five integrated steel plants.

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With technical and managerial expertise and know-how in steel making gained over four decades, SAIL's Consultancy Division (SAILCON) at New Delhi offers services and consultancy to clients world-wide. SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS) at Ranchi which helps to produce quality steel and develop new technologies for the steel industry. Besides, SAIL has its own in-house Centre for Engineering and Technology (CET), Management Training Institute (MTI) and Safety Organisation at Ranchi. Our captive mines are under the control of the Raw Materials Division in Kolkata. The Environment Management Division and Growth Division of SAIL operate from their headquarters in Kolkata. Almost all our plants and major units are ISO Certified. Here, for the production analysis, the data regarding Finished Steel is taken into consideration. 3.1 Production Details Capital Employed (K) year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (rs. in crore) 18265 17045 16542 15271 20064 21782 25476 28450 34552 43752 no. of Employees (L) 150832 147601 137496 131910 126857 138211 132973 128804 121295 116950 Production million tons) (Q) 7.126 7.315 8.029 8.581 8.901 9.351 9.849 10.288 9.846 9.736 (in

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3.2 Comparison Between Ideal and actual Production curve:

Ideal Production Curve

Source: http://www.swlearning.com/economics/salvatore/salvatore5e/ch01.pdf

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output vs. Labour

12 11 10 9 8 output vs. Labour 7 6 5

Actual production curve(SAIL)

3.4 Descriptive data: Count Sum Maximum Minimum Mean Median Standard deviation 10 89.022 10.288 7.126 8.9022 9.126 1.112755019 10 241199 43752 15271 24119.9 20923 9170.08784 10 1332929 150832 116950 133292.9 132441.5 10671.748

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3.5 Regression Analysis:

Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations

0.825430802 0.681336009 0.590289155 0.082989426 10

ANOVA
Significance SS MS F F 0.103079 0.05154 7.483356 0.018266926 0.048211 0.006887 0.15129

Regression Residual Total

df 2 7 9

Coefficients

Intercept 12.4062558 -4.9526 29.76511 X Variable 1 0.105405824 0.124444 0.847014 0.424995 0.18885754 0.399669 0.18886 0.399669 X Variable 2 -0.95656085 0.537485 -1.7797 0.118347 2.22751038 0.314389 2.22751 0.314389

Upper Lower 95% 95% 7.341064 1.689981 0.134878 4.95260142 29.76511 t Stat P-value

Standard Error

Lower 95.0%

Upper 95.0%

Now we will move towards the final and required our interpretation by using cob-dougles output function that is Q= In A + a InK + b InL By using the co-efficient column, we can derived or get the following regression equation as follow:
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ln Q = 12.4063 + 0.1054 lnK + -0.9566 lnL

3.6 Executive Summary: To perform regression analysis the collected data has been transformed in to the logarithm form, than the regression analysis is performed which gives the following production function of the SAIL ln Q = 12.4063 + 0.1054 lnK + -0.9566 lnL From the above result of the production function it is to conclude that the production of the SAIL is capital intensive rather than the labour intensive.

The production function of the SAIL through the regression analysis which is helpful to understand that the production is capital intensive and it can also important to estimate the volume of production for the coming years.

4. Bibliography
Salvatore,D. (2008). Managerial economics: Oxford University Press. Gupta,S.P (2008). Business Statistics: Sultanchand & Sons. http://www.sail.co.in/pdf/2010digest.pdf

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