topic 2: the relationship between microeconomics and...

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

Topic 2: The relationship between Microeconomics

and Management AccountingAna Mª Arias Alvarez

University of OviedoDepartment of Accounting

[email protected]

School of Business AdministrationCourse: Financial Statement Analysis and Management Control

Bachelor’s Degree in Economics


2.1. Basic concepts of the theories of production andcosts: a practical approach.

2.2. Necessary information to achieve scale, technicaland allocative efficiency.

2.3. Determining the costs of products and services.

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THE PRODUCTION FUNCTION

2.1: BASIC CONCEPTS OF THE THEORIES OF PRODUCTION AND COSTS: A PRACTICALAPPROACH.

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The law of diminishing returns states that as the use of an input increases (with otherinputs fixed), point will eventually be reached at which the resulting additions tooutputs decrease.

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Short‐run costs

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Ana Mª Arias Alvarez (University of Oviedo) The relationship between Microeconomics and Management Accounting OpenCourseWare7/17


Task: try to solve problem 2.1.

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If the fixed input is divisible:

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2.2: NECESSARY INFORMATION TO ACHIEVE SCALE, TECHNICAL ANDALLOCATIVE EFFICIENCY.

Scale efficiency means that firms are of the appropriate size. Profit is at a maximum wheremarginal revenue equals marginal cost. If the firm is operating under perfect competition, thatis 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 possibleimprovement in outcome is obtained from a set of resource inputs. An intervention istechnically inefficient if the same (or greater) outcome could be produced with less of onetype of input.

Allocative efficiency describes the use of inputs in the proportion that minimizes the cost ofproduction, given input prices.

Economic efficiency comprises both technical efficiency and allocative efficiency.

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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 , andwhen the adequate plant size and combination of inputs have been chosen in order tominimize costs.

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Expansion Path

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The expansion path describes the combinationsof labour and capital that the firm shouldchoose to minimize costs for every output level.It shows the lowest long‐run total cost ofproducing each level of output.

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The relationship between short‐run and long‐run cost:

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If there are only 3 choices of plant size in the long run:

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Task: try to solve problem 2.2.

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2.3: DETERMINING THE COSTS OF PRODUCTS AND SERVICES.

How can cost information be of assistance in providing answers to questions about theconsequences of following particular courses of action:

1) Make or buy decisions: relevant costs should be taken into account (those expectedfuture costs that differ among alternative courses of action).

2) Determining the long‐run optimum production plan: the difference betweenrevenues and variable costs should be maximized taking into account technical andmarket restrictions.

3) How many units must be sold to break‐even? Costs should be separated into theirfixed 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?

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topic 2: the relationship between microeconomics and...

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