Transcript Chapter 13

Economics 160
Principles of Economics
Chapter 8
Department of Economics
College of Business and Economics
California State University-Northridge
Professors Ng
Administrative Details
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13-2
Data firm uses to make its Output Decision- The Unit Cost Graph.
This a per unit not a total graph.
$ per unit
MC
30
ATC
21
20
12
AVC
10
9
If the firm chooses to
produce 50 units of the
good, its’ ATC is $21,
AVC is $12 and MC is $30
The firm chooses output level
If the firm chooses to
produce 10 units of the
good, its’ ATC is $20,
AVC is $10 and MC is $9
10
50
Q
Q
The Meaning of Competition
o A perfectly competitive market has the following
characteristics:
o There are many buyers and sellers in the market.
o The goods offered by the various sellers are largely the
same.
o Firms can freely enter or exit the market.
o As a result of its characteristics, the perfectly
competitive market has the following outcomes:
o The actions of any single buyer or seller in the market
have a negligible impact on the market price.
o Each buyer and seller takes the market price as given.
o Buyers and sellers in competitive markets are said to be
price takers.
Data firm uses to make its Output Decision- The Unit Cost Graph (2).
Unit Cost Curves of a Firm
Market Supply and Demand
$ per unit
Q
In a competitive market,
the firm gets a price of
$12 no matter how much it
decides to produce.
MC
Supply
P market
price
= $12
ATC
AVC
Demand
Q
Q
Profit Maximization for the
Competitive Firm
 Discussion of how the firm decides how much to produce.
 Will assume that the firm is a price taker in a competitive
market i.e. it assumes that it can sell as much or as little as it
desires at the prevailing market price.
 The goal of a competitive firm is to maximize profit.
 The firm in a competitive market can maximize profits by
applying the 3-part output rule of a price taking firm.
 Shutdown Decision: Should if produce at all?
 Short Run Output Decision: If the firm is going to produce
how much should it produce in the short run?
 Long Run Entry and Exit Decision: In the long run, should
the firm stay in business?
 Examine each of these three decision in detail.
The Firm’s Shut Down Decision
 The firm should shutdown in the short run, i.e. produce nothing if the price is
below the minimum AVC of production.
 If the price is below the min. AVC, the firm would lose less by shutting
down.
 If the firm shutdown, it would lose only its’ fixed costs.
 If it produced, it would lose its’ fixed costs and a portion of its’ variable
costs.
 Therefore, it would lose less in the short run by shutting down.
 If the price is between the min. AVC and the min. ATC, the firm should
produce even though it loses money by doing so.
 The price it is getting is sufficient to cover its variable costs and a
portion of its’ fixed costs.
 Therefore the firm will lose less by producing than it would be shutting
down.
 If the price is above the min. ATC, the the firm can produce at a profit.
 The price it is getting is sufficient to cover all of its’ costs.
Example of Shutdown Decision
 Gas Station:
 Cost of pumps, building, bullet proof cashiers station, etc--$500,000.
 Labor cost to keep gas station open-$10/hr. and gasoline has a wholesale
cost of $1/ gallon.
 Gasoline sells for $1.50 per gallon.
 If the gas station is opened for one day (24 hours), they will sell 500 gallons.
Should the owner shutdown?
 Compare shutting down vs. opening.
 Shutdown-Lose $500,000
 Open-$750 revenue, $240 labor costs, $500 gasoline costs.
• Price exceeds the variable cost of producing so the firm loses less
by producing—only lose $499,990.
• They are still producing at a loss, but lose less by producing than
by shutting down.
 Suppose if the gas station opened for one day, they will sell 400 gallons.
Should the station shut down?
 Shutdown-Lose $500,000
 Open- $600 revenue, $240 labor costs, $400 gasoline costs-lose
$500,040.
The Firm’s Decision to Shut Down
If P > min ATC, The firm is covering its’
fixed and variable costs, is earning a
profit and should continue producing..
$/unit
MC
If min AVC<P <min ATC, The firm should
keep producing in the short run. It is
covering its’ variable costs and a portion of
its’ fixed costs. Therefore, it loses less by
producing than shuttingATC
down.
Produce at a profit
in the short run
AVC
Produce at a loss
in the short run
Shutdown
0
If P <min AVC, the firm
should shutdown.
The price its’ getting is
insufficient to cover its’ variable costs.
If it produces, the firm will lose not
only its’ fixed cost but also a portion of
its’ variable cost.
Therefore, the firm would
lose less if it shutdown and only lost
its’ fixed costs.
Output
Short Run Output Decision
 Once the firm has made the shutdown decision and
decided not to shutdown, the next decision the firm must
make is how much to produce.
 The firm can determine the profit maximizing (or loss
minimizing) level of output by setting P=MC.
 An alternative way of determining the profit maximizing
level of output is to use the following rule:
 If P>MC increase output.
 If P<MC decrease output.
 If P=MC leave output unchanged.
Profit Maximization for the
Competitive Firm
Costs
and
Revenue
MC
ATC
P
0
P = AR = MR
AVC
Quantity
Profit Maximization for the
The firm maximizes profit by
Competitive Firm
producing the quantity at
which marginal cost equals
marginal revenue.
$/unit
MC
ATC
P
0
P = AR = MR
AVC
QMAX
Output
Profit Maximization for the
Competitive Firm
$/unit
MC
ATC
P
0
P = AR = MR
AVC
QMAX
Output
Profit Maximization for the
If the firm is producing Q1 when the P=MR1, the
Competitive Firmfirm is not maximizing profit.
What could the firm do to increase profits? Why?
If it increased output by one unit, the extra cost the
firm would incur (its MC) would be less than the
extra revenue it would receive from selling that one
extra unit produced (the priceMC
or marginal revenue).
$/unit
Therefore, the firm would increase its’ profit or
reduce its’ loss by expanding output.
ATC
P = MR1
P = AR = MR
AVC
MC1
0
Q1
QMAX
Output
Profit Maximization for the
Competitive Firm
$/unit
MC
ATC
P = MR1
P = AR = MR
AVC
MC1
P > MC,
increase Q
0
Q1
QMAX
Output
Profit Maximization for the
is producing Q2 when the P=MR1, the
Competitive FirmIffirmtheisfirm
not maximizing profit.
What could the firm do to increase profits? Why?
Costs
and
Revenue
MC2
If it decreased output by one unit, the extra cost the
firm would save (its MC) would be more than the
extra revenue it would forego from selling one fewer
MC
unit (the price).
Therefore, the firm would increase its’ profit or
reduce its’ loss by reducing output.
ATC
P = MR2
0
P = AR = MR
AVC
QMAX
Q2
Quantity
Profit Maximization for the
Competitive Firm
Costs
and
Revenue
MC
MC2
ATC
P = MR2
P = AR = MR
AVC
P < MC,
decrease Q
0
QMAX
Q2
Quantity
An Application of the Short Run Output
Rule and the Importance of Marginal
Thinking
 Many “business problems” can be solved by using a specific
type of logic—marginal thinking or thinking at the margin.
 Thinking “at the margin” means asking and answering the
following question:
 Given what has already happened, what will happen if a firm
engages in one more unit of an activity.
 This type of logic can be applied to most “business
problems.”
 Simple cost/benefit analysis is an example of marginal thinking.
 How late should a store stay open?
 Should an amusement park build an additional ride?
 Should carmakers provide additional options on a car-4
doors/2doors/targa top/hatchback.
Thinking at the Margin in Action.
 While the idea of Thinking at the Margin principle can be stated simply,
applying it in real life can be quite complex and involved.
 In some lines of business, hundreds of employees and the MIS of
the company are designed around the implementation of the
equimarginal principle.
 Example: The comping system at Las Vegas casinos.
 What is the goal of the casino?
 Maximize profits.
 What is the main source of casino revenue?
 Player losses.
 Profits=Player Losses-Costs
 How does the casino get players to come to their casino and
gamble, e.g. lose?
 Attractions, entertainment, restaurants, etc
 Giving away free stuff.
• Rooms, airplane tickets, shows, food, etc.
 Business problem: who gets the free stuff an how much?
Making the Comping Decision: An Example of Marginal
Thinking or the Equimarginal Principle in Action.
oCollecting the necessary information.
oLayout of Casino Floor and the Role of
Employees.
oRunner, Dealer, Pit Boss.
Casino Host. Shift Manager.
Casino Manager.
oResponsibilities of Pit Boss
oPrevent cheating sometimes called
“maintaining the integrity of the
game.”
oCommon forms of cheating.
oCapping, hold outs, signaling,
and Card Mechanics.
oGambling Scams : How They
Work, How to Detect Them,
How to Protect Yourself
by Darwin Ortiz
oPlayer development. Collection of
information about players.
The Rating Slip
•What happens when a person
enters the casino?
•Collection of information about
players.
•Buy in.
•Time.
•Average Bet.
•Estimated Win/Loss
•Information is input into MIS of
the casino—runner.
•Surveying the Rack and
estimating players win/loss.
•Detecting cheating.
•Action=Total amount bet by
player.
Computing the Player’s Rating
Using the information from the rating slip, the casino’s
management information system uses the following
formula to calculate a players expected loss.
ExpectedLoss  averagebet * decisionsper hour *
hoursplayed* house edge
For a player betting $100 per hand at
blackjack.
ExpectedLoss  $100* 60 * 4 * .02
 $24,000* .02
 $480
Lexicon of Gambling
RFB Comp
Run of the House
Black player
Green player
Whale
Computing Player Rating (2)
 Casino will give back in comps roughly 50% of the
expected loss.
$50 rating-$240 expected loss $120 of comps.
$100 rating-$480 expected loss$240 of comps.
$200 rating-$980 expected loss $480 of comps.
 How much must you bet to get a room comp at a various
casinos.
A-Hotels--$200+ rating: MGM, Bellagio, Treasure
Island, Mirage.
B-Hotels--$100+ rating: Luxor, Venetian, Monte Carlo,
New York, New York.
C-Hotels---$50+ rating: Excalibur, Circus Circus,
Stardust.
How to get a free weekend in Las
Vegas?
 The job of the Casino Host.
 How do you establish yourself
on a casino VIP list?
 Comp City by Max Rubin
Lexicon of Gambling
RFB Comp
Run of the House
Black player
Green player
Whale
Casino Host
Front Money
CD
Getting a free weekend in Las Vegas?
•
How do professional gamblers attack the casino?
•
Assumptions the casino is making in its’ rating formula.
•
Average bet, decisions per hour, hours played, house edge.
•
Most of the “action” occurs in the assumptions about house edge.
•
Craps--.1% to 10%, Roulette-5.25%, Caribbean Stud, Let it Ride,
Etc.—5+%.
•
Blackjack and Pai Gow-depends upon skill of the player.
•
Basic Strategy and Counting Systems.
ExpectedLoss  averagebet * decisionsper hour *
hoursplayed* house edge
ExpectedLoss  $200* 60 * 4 * .002
 $48,000* .001
 $48
Review: The 3-part output rule of firm in a
competitive market.
 Once the firm knows it’s unit costs (ATC, AVC, and MC) at
each level of output and the prevailing market price, a
price taking firm can determine the profit maximizing level
of output by applying the 3-part output rule.
Shutdown if the P < min AVC.
Explain.
If the firm is going to produce in the short run, produce
the Q where P=MC even if it means losing money.
Explain.
In the long run, exit if P < min ATC.
Explain.
Data firm uses to make its Output Decision.
Units costs and market price.
Costs
and
Revenue
MC
ATC
P
0
P = AR = MR
AVC
Quantity
The Firm’s Decision to Shut Down: Shutdown if P<min AVC
If P > min ATC, The firm is covering its’
fixed and variable costs, is earning a
profit and should continue producing..
$/unit
MC
If min AVC<P <min ATC, The firm should
keep producing in the short run. It is
covering its’ variable costs and a portion of
its’ fixed costs. Therefore, it loses less by
producing than shuttingATC
down.
Produce at a profit
in the short run
AVC
Produce at a loss
in the short run
Shutdown
0
If P <min AVC, the firm
should shutdown.
The price its’ getting is
insufficient to cover its’ variable costs.
If it produces, the firm will lose not
only its’ fixed cost but also a portion of
its’ variable cost.
Therefore, the firm would
lose less if it shutdown and only lost
its’ fixed costs.
Output
Short Run Output: P=MC
$/unit
MC
ATC
P
0
P = AR = MR
AVC
QMAX
Output
The Long-Run Decision to Enter or
Exit an Industry
 The long-run is period of time long enough that a
firm can control/avoid both its’ variable and fixed
costs, i.e. they can exit or enter an industry.
 In the long-run, the firm exits if the revenue it
would get from producing is less than its total
cost.
Exit if P<min ATC.
 New firms will enter the industry if such an action
would be profitable.
Enter if P >min ATC
Profit as the Area Between Price and
Average Total Cost
Price
MC
P
ATC
P = AR = MR
At this price, how much will the
firm produce?
0
Quantity
Profit as the Area Between Price and
Average Total Cost
Price
What will the firm’s profit be if it
produces Q?
How much profit is the firm
making per unit it produces?
P
MC
ATC
P = AR = MR
ATC
Profit-maximizing
quantity
0
Q
Quantity
Profit as the Area Between Price and
Average Total Cost
Price
MC
ATC
Profit
P
P = AR = MR
Profit per Unit
ATC
Profit-maximizing
quantity
0
Q
Units Sold
Quantity
Loss as the Area Between Price and
Average Total Cost
Price
If the price is P, will the firm
shutdown?
If it produces, how much should
it produce?
MC
Will it be earning a profit?
ATC
What will its’ loss be?
P
P = AR = MR
AVC
0
Quantity
Loss as the Area Between Price and
Average Total Cost
Price
MC
ATC
ATC
AVC
P
P = AR = MR
Loss-minimizing quantity
0
Q
Quantity
Loss as the Area Between Price and
Average Total Cost
How much is the firm
losing on each unit it
produces?
Price
MC
ATC
ATC
P
P = AR = MR
Loss
Loss-minimizing quantity
0
Q
Quantity
The Competitive Firm’s Supply Curve
Costs
The competitive firm’s long-run
supply curve is the portion of its
marginal-cost curve that lies above
average total cost.
MC
ATC
AVC
The firm’s short-run supply curve is
the portion of its marginal cost curve
that lies above average variable cost
0
Quantity
Review: The 3-part output rule of firm in a
competitive market.
 Once the firm knows it’s unit costs (ATC, AVC, and MC) at
each level of output and the prevailing market price, a
price taking firm can determine the profit maximizing level
of output by applying the 3-part output rule.
Shutdown if the P < min AVC.
Explain.
If the firm is going to produce in the short run, produce
the Q where P=MC even if it means losing money.
Explain.
In the long run, exit if P < min ATC.
Explain.
Market Supply in a Competitive Market
Market supply equals the sum of the quantities.
supplied by the individual firms in the market.
 Market Supply with a Fixed Number of Firms
(Short Run Supply Curve).
 For any given price, each firm supplies a quantity of
output so that price equals its marginal cost.
 The market supply curve reflects the individual firms’
marginal cost curves.
 Market Supply with Entry and Exit (Long Run
Supply Curve).
 Firms will enter or exit the market until profit is driven to
zero.
 In the long-run, price equals the minimum of average
total cost.
 The long-run market supply curve is horizontal at this
price (constant cost industry).
The left hand graph shows the unit cost curves for a single firm producing the
good. An industry is composed of many firms with identical cost curves all
producing the same good.
Initial Condition: Long Run Equilibrium
The Short Run Market Supply curve shows the amount produced by the
existing firms as price varies. The Long Run supply curve shows how the
amount produces as price varies when the effects of entry and exit to the
industry are included.
Market
Representative Firm
$/unit
MC
Price
ATC
S 100 firms
A
P1
Long-run
supply
P1
D1
0
Quantity
(firm)
0
Q1
Quantity
(market)
$/unit
Firm 1
MC
ATC
P1
3-Firm Industry
(alternative setup)
Market
Price
Quantity
(firm)
0
$/unit
Firm 2
S
MC
ATC
100 firms
A
P1
Long-run
supply
P1
D1
Quantity
(firm)
0
$/unit
0
Firm 3
MC
ATC
P1
0
Quantity
(firm)
Q1
Quantity
(market)
At current output levels (Q1-
. The
increase in
demand (D1 to D2)
causes the price in to
increase.
Short-Run Response
to an increase in Demand
industry, q1-firm) the existing
firms are producing where P
>MC.
Therefore, they can increase
profits by increasing output.
Market
Firm
$/unit
Price
MC
ATC
B
S 100 firms
A
P1
Long-run
supply
P1
D2
D1
0
q1
Quantity
(firm) in
increase
0
The
output by
existing firms causes a
movement along the short run
supply curve (S1) from A to B.
Q1
Quantity
(market)
Short-Run Response to an increase in Demand
Since all existing firms are
increasing output, industry
output increases from Q1 to
Q2.
Market
Firm
$/unit
Price
MC
ATC
B
P2
P2
P1
P1
0
Existing firms choose
their output level by
setting price equal to
MC.
SinceQuantity
the price has
0
(firm)
risen, the quantity at
which P=MC is now
higher.
Therefore, existing firms
increase output.
S 100 firms
A
Long-run
supply
D2
D1
Q1
Q2
Quantity
(market)
Short-Run Response to an increase in Demand
In the short run, the existing
firms will earn a profit.
Market
Firm
$/unit
Price
Profit
MC
ATC
B
P2
P2
P1
P1
S 100 firms
A
Long-run
supply
D2
D1
0
Quantity
(firm)
0
Q1
Q2
Quantity
(market)
Increase in Demand in the Long Run
 Over time, the short-run supply curve shifts as
profits encourage new firms to enter the market.
 Price falls as new firms enter the market
 In the new long-run equilibrium profits return to
zero and price returns to minimum average total
cost.
 The market has more firms to satisfy the greater
demand.
At price P2, existing firms are earning a
profit.
Entrepreneurs see the profit earned by
existing firms and open new firms (enter the
industry).
Long-Run Response
Market
Firm
Price
Price
Profit
MC
ATC
B
P2
P2
P1
P1
S100 firms
A
Long-run
supply
D2
D1
0
Quantity
(firm)
0
Q1
Q2
Quantity
(market)
As new firms enter, the amount of the good
produced at each price by the existing firms
(new and old) has increased.
This is depicted as a shift in the short run
supply curve from S1 to S2.
Long-Run Response
Market
Firm
Price
Price
Profit
MC
ATC
B
P2
P2
P1
P1
S100firms
S150 firms
A
Long-run
supply
D2
D1
0
Quantity
(firm)
0
Q1
Q2
Quantity
(market)
Long-Run Response
As the new firms begin producing, the price
falls from P2 to P1.
Market
Firm
$/unit
Price
MC
ATC
B
P2
P1
S100firms
S150 firms
A
Long-run
supply
P1
D2
D1
0
Quantity
(firm)
0
Q1
Q2
Quantity
(market)
New firms will continue
toDemand
enter the industry,in the Short and
Increase
in
increasing the quantity produced, shifting the
short run supply curve outward, and driving
Long
Run
down the price until potential entrants no
longer anticipate earning a profit after
entering the industry.
Market
Firm
$/unit
Price
MC
ATC
B
S150 firms
A
P1
S100firms
C
Long-run
supply
P1
D2
D1
0
Quantity
(firm)
0
Q1
Q2
Q3
Quantity
(market)
Shape of the Long Run Supply
Curve.
The shape of the Long Run Supply Curve
depends on the costs of potential entrants.
If potential entrants have the same costs as
existing firms the LRSC will be flat because it is
a constant cost industry.
If potential entrants have higher costs than
existing firms the LRSC will be upward sloping
because it is a increasing cost industry.
Market for Fatburgers.
 What is takes to own a Fatburger.
 Net Worth of $250,000 with $150,000 in liquid assets.
 $30,000 franchise fee.
 $370,000-$730,000 startup costs.
 25% of startup costs funded from personal resources.
 Pay 5% of net sales.
 Example of business in a box.
 Invest $500,000 and earn $200,000 in first year profits.
 Constant Returns to Scale Industry
Basics of Oil Exploration
World Proven Petroleum Reserves, 2001
Billions of Barrels and Percent of World
Region
Proven Reserves
North America
63.9
6%
S. & Cent. America
96
9%
Europe
18.7
2%
Former Soviet Union
65.4
6%
Iran
89.7
9%
Iraq
112.5
11%
Kuwait
96.5
9%
Saudi Arabia
261.8
25%
United Arab Emirates
97.8
9%
Total Middle East
685.6
65%
Africa
76.7
7%
Asia Pacific
43.8
4%
TOTALWORLD
1050
100%
Source: British Petroleum
An Increasing Cost Industry-Oil Industry
$/unit
MCSaudia Arabia
P1=$30
Profit
ATCSaudia Arabia
P1=$10
Profit
In 1930, oil was only produced in the Middle East, the demand
for oil was not that great, and the price of oil was low—P1. At
P1 it was profitable to produce oil in Saudi Arabia and other
parts of the Middle East but not in other parts of the world.
As the 20th century progressed, the demand for oil increased.
There was a short term increase in Middle Eastern oil production
and in the long run (point B), the high price of oil led to the
discovery of higher cost deposits in other parts of the world.
Will the entry of new firms, i.e. the discovery of new oil
deposits outside the Middle East, eliminate the oil profits of
Saudi Arabia?
Quantity
(firm)
$/unit
P
MCrest of world
SMiddle East
P2=$30
A
SME + rest of world
B
ATCrest of world
LRS
AVCrest of world
D1970
A
P1=$10
P1
D1930
0
q1
Quantity
(firm)
0
Q1
Quantity
(market)
Start off in Long Run Equilibrium
Constant or Increasing Cost Industry?
Change in the world: Newspaper article or other source.
1. Change in Demand (normal/inferior, complements/substitutes).
• Change in income, change in the price of a related good, change in preferences.
2. Change in the price of inputs.
• Increased wages, higher interest rates, higher fuel costs, higher insurance, etc.
3. Change in technology.
4. Other
Unit cost curves: Will a firm’s unit cost curves
shift up or down?
At the current price, will existing firms produce
more or less
Short Run Supply: Shift to the right or left
Where is the new short run equilibrium?
At the new price will existing firms be losing
money, making money breaking even.
Long Run Changes: What effect will entry and
exit of firms cause to the short run supply curve,
output, and price. Is this an Increasing or
Constant Cost Industry
Demand: Shift to the right or left.
1. Where is the new short run Equilibrium?
2. What is the new price?
Short Run Changes: at the new price how will
existing firms adjust output?
Apply 3-Part Output Rule, i.e. shutdown decision
and short run output decision
Long Run Changes: What effect will entry and
exit of firms cause to the short run supply curve,
output, and price. Is this an Increasing or
Constant Cost Industry?
Starting Point: Markets in Long Run Equilibrium (Constant Cost Industry)
1. Market Demand is in short and long run equilibrium at a price where existing
firms are breaking even.
2. Can use a single unit cost graph because all firms have the same unit costs.
3. For analysis of an increasing cost industry see the oil industry example.
Representative Firm
$/unit
MC
Market
Price
ATC
S N firms
A
P1
Long-run
supply
P1
D1
0
Quantity
(firm)
0
Q1
Quantity
(market)
Articles
How Porsche Revived Itself (1996)
Putting Porsche in the Pink (1996)
Porsche's Big Bet: First New Model in
Years (1997)
A Boxster Built Anywhere is Still a
Boxster (1997)
Porsche Doubles Finnish Output of
Popular Boxster (1998)
Economic Analysis
Effect of Changes in the World:
1.
2.
3.
Changes in Demand
Changes in Input Prices
Changes in Technology
To Analyze the Effect of a given change in the
world:
1) figure out what in the graphs is changing.
a)
Input Prices
b)
Technology
c)
Market Demand
2)
Shift the Appropriate Curve.
3)
Work your way through all the graphs.
4)
Interpret graphs to determine the effects
of the Change in the World.
Unit Cost up or
Down?
Change in Demand causes a change in the market
price triggering a change in firms production.
$/unit
Price
Entry or exit
of firms in
the LR?
MC
Change in Price
P1
A
A
Increase or
decrease in
supply
AVC
0
q1
S1
ATC
Quantity
(firm)
Long-run
supply
P1
D1
0
Q1
Quantity
(market)
With Prospect of Chapter 11 Looming, Delta and Pilots Bargain
By MICHELINE MAYNARD
Delta Air Lines and its pilots union continued bargaining today on the airline's demand for $1 billion in contract
concessions, with the prospect of a Chapter 11 filing as soon as Wednesday hanging over the discussions. Negotiators for
Delta and the Air Line Pilots Association met through the night Monday and into today, a spokeswoman for the union said. She
declined to comment further.
On Monday, Delta said it had reached a $600 million financing agreement with American Express Travel Related
Services, including a $100 million loan. The airline also said it had reached a deal with various debt holders to defer $135
million in notes that were due next year. But Delta said in a regulatory filing that it had not reached agreement on debtor-inpossession financing, which it would need in order to run its operations under Chapter 11 protection.
A court filing could occur as soon as Wednesday if the airline cannot agree with its pilots on $1 billion in wage and
benefit cuts and resolve other financial issues, people with knowledge of Delta's plans have said.
Delta, the third-largest airline behind American and United, has warned repeatedly that it will have to seek court
protection unless it reaches a deal with its pilots on $1 billion in wage and benefit cuts, and achieves agreements with its debt
holders. Delta's pilots, who are the highest paid in the industry, have proposed cuts worth up to $705 million. A Chapter 11 filing
by Delta would mean half the industry's traditional airlines were under court protection. US Airways filed for its second
bankruptcy in two years on Sept. 12, while United sought Chapter 11 in December 2002. Agreement with the pilots' union is
required for Delta's deal with American Express to take effect. Under it, American Express said it would lend Delta $100 million
as part of a credit facility. Delta said it was still completing deals with other lenders.
The rest of the agreement, $500 million, is in an arrangement involving Delta's SkyMiles, the points awarded by
its frequent flyer program. The agreement is backed by Delta's assets, and includes lengthy requirements that Delta must meet
in the event that it seeks Chapter 11 protection. Today is an early deadline set by Delta for holders of $20 billion to exchange
their debt under terms that are easier for Delta to meet. The final deadline for the exchange is Nov. 18, but terms are more
attractive to debt holders who exchange early.
Delta extended the exchange offer in September after it failed to receive enough responses to its first effort.
The success of the exchange offer is one of the requirements under an agreement reached Monday with various
lenders for Delta to defer $135 million in debt due next year, Delta said. Under that agreement, Delta could exchange that debt
for debt with a higher interest rate that would come due in 2007.
Analyzing the effect of a decrease in the price of labor
Will the likely new contract increase of decrease the cost of production?
Will unit costs at any output level increase or decrease?
At any given price will existing firms produce more or less?
What effect will this have on the short run supply curve?
After the decrease in the price of labor, the unit costs of production
are lower at each level of output. At every price each firm will
produce more (at P1 the firm will increase output from q1 to q2).
The increase in output at each price by existing
firms causes the short run supply curve to shift
right, lowering price to P2
L
$/unit
Price
MC
S1
ATC
S2
A
A
P1
Long-run
supply
P1
AVC
P2
D1
0
q1
q2
Quantity
(firm)
0
Q1
Quantity
(market)
Who benefits and loses from a reduction in the cost of labor.
Consumers are better off because the price of the good has fallen.
In the short run, firms are better off because their costs fall and they earn a profit.
In the long run, if the existing firms are earning a profit because of lower costs, new firms will enter shifting the short
run supply curve to the right, increasing output, and further lowering price.
If this were a constant cost industry, the reduction in the cost of labor would cause the long run supply curve to shift
down.
In the Long Run, consumers are the sole beneficiary of the drop in the price of labor.
The reduced unit costs of production mean that at any given price the existing firms will produce more, shifting the short
runs supply curve outward. Even at the new lower price, the existing firms will earn a profit in the short run.
In the long run, new firms will continue entering shifting the SR supply curve farther to the right, increasing supply, and
reducing price until the existing firms are just breaking even with their
$/unit
Pricelower costs.
MC
S1
ATC
A
A
P1
S2
S3
Long-run
supply
P1
AVC
P2
D1
0
q1
q2
Quantity
(firm)
0
Q1
Quantity
(market)
Who benefits from an improvement in technology?
An improvement in technology is any change which allows a firm to produce more output with the same
inputs.
A degredation in technology is any change which means a firm to produces less output with the same
The reduced unit costs of production mean that at any given
inputs.
price the existing firms will produce more, shifting the short
The improvement in technology allows the firm to
produce more output with the same inputs.
Because the firm is producing more output with fewer
inputs, and the price of inputs hasn’t changed, the unit
costs of producing will fall.
runs supply curve outward. Even at the new lower price, the
existing firms will earn a profit in the short run.
In the long run, new firms will continue entering shifting the
SR supply curve farther to the right, increasing supply, and
reducing price until the existing firms are just breaking even
with their lower costs.
In the SR, firms and consumers benefit from the
$/unit improvement in technology. In the LR just consumers
benefit.
MC
Price
S1
ATC
A
A
P1
S2
S3
Long-run
supply
P1
AVC
D1
Quantity
q1
(firm)
If this were a constant cost industry, the technological
change would shift the long run supply curve down.
0
0
Q1
Quantity
(market)
The Effect of Immigration
 What would be the effect of relaxing barriers to
immigration?
 Who would be better off?
Immigrants?
Americans?
 Will increased immigration affect:
Supply of goods
Demand for goods
The Effect of Immigration
•The market starts in LR equilibrium at a price of P1
•If the number of immigrants increased, how would that affect the unit cost curves of a firm.
•Reduce the cost of labor and reduce the unit costs of production (Downward shift of the MC and
ATC curves).
•At any given price, what will happen to the number of units a single firm will produce and the market
supply curve?
U.S. Market
The increased production by all firms causes the short
U.S.
term supply curve to
shiftFirm
to the right and a short term
reduction in price and increase in quantity produced. Price
$/unit
Because the MC has shifted down
when the firm chooses the quantity
where P=MC, the firm will produce
more at any given price.
MCstart
Sstart
ATCstart
MCimmigration
P1
P2
Simmigration
Long-run
supply
P1
ATCimmigration
Dstart
0
Quantity
(firm)
0
Q1
Quantity
(market)
The Effect of Immigration
•What effect will increased immigration have on firm profit in the short run? Are existing firms earning a
profit in the short run?
•In the long run, will there be entry or exit to this industry? What effect will this have on the market supply
curve and price.
P=MC
Profit per unit is the distance between
ATC and P.
Total profit is the yellow box.
In the long run, new firms will enter
the market further expanding supply
and further reducing price until the
existing firms are noU.S.
longer
earning
Firm
profits.
U.S. Market
Price
$/unit
MCstart
Sstart
ATCstart
MCimmigration
P1
P2
P3
Simmigration
Simmigration 2
P1
Long-run
supply
ATCimmigration
Dstart
0
Quantity
(firm)
0
Q1
Quantity
(market)
The Effect of Immigration
•In the short run, increased immigration will reduce the cost of production, increase the supply of goods
and services and lower prices.
•In the short run, the beneficiaries of increased immigration are consumers in the United States who can
buy at lower prices, and firms which earn a profit from reduced costs.
•In the long run, the beneficiaries of increased immigration are consumers, because competition and entry
of new firms eliminates the profits from reduced costs.
U.S. Market
U.S. Firm
Price
$/unit
MCstart
Sstart
ATCstart
MCimmigration
P1
Simmigration
Simmigration 2
P1
Long-run
supply
ATCimmigration
P3
Dstart
0
Quantity
(firm)
0
Q1
Quantity
(market)
Articles
How Porsche Revived Itself (1996)
Putting Porsche in the Pink (1996)
Porsche's Big Bet: First New Model in
Years (1997)
A Boxster Built Anywhere is Still a
Boxster (1997)
Porsche Doubles Finnish Output of
Popular Boxster (1998)
Economic Analysis
Effect of Changes in the World:
1.
2.
3.
Changes in Demand
Changes in Input Prices
Changes in Technology
To Analyze the Effect of a given change in the
world:
1) figure out what in the graphs is changing.
a)
Input Prices
b)
Technology
c)
Market Demand
2)
Shift the Appropriate Curve.
3)
Work your way through all the graphs.
4)
Interpret graphs to determine the effects
of the Change in the World.
Unit Cost up or
Down?
Change in Demand causes a change in the market
price triggering a change in firms production.
$/unit
Price
Entry or exit
of firms in
the LR?
MC
Change in Price
P1
A
A
Increase or
decrease in
supply
AVC
0
q1
S1
ATC
Quantity
(firm)
Long-run
supply
P1
D1
0
Q1
Quantity
(market)
Article Copyright 1997 Investor's Business Daily, Inc.
Investor's Business Daily
HEADLINE: Porsche's Big Boxster Bet: 1st New Model In 20 Years
BYLINE: By Paul A. Eisenstein, Investor's Daily
BODY: It may be only a two-seater, but Porsche has a lot riding on its new Boxster sports car.
The German manufacturer's first all-new model since 1978, the eagerly-awaited Boxster, is designed to not only expand the
company's lineup, but help it regain some of the volume lost during a precipitous plunge in the late 1980s and early 1990s.
Porsche will have a tough challenge, though, for the Boxster is going up against other new sports cars, including the
Mercedes SLK and Chevrolet's completely new Corvette.
Times have certainly been tough for Porsche. Worldwide volume peaked at nearly 50,000 in 1986, with 60% in the U.S. But
three years later, the market collapsed. And by the time the company hit bottom U.S. sales had fallen below 3,000.
With the auto maker bleeding cash, there were serious questions about Porsche's viability.
After a string of management changes, its new chairman, Dr. Wendelin Wiedeking, launched an aggressive cost-cutting
program. Wiedeking called in a cadre of Japanese consultants, including former executives from Toyota, the world's most
efficient automaker.
By the time the dust settled, Porsche had cut nearly in half - to an average 70 hours - the time it takes to build the redesigned
911. That bought the company some time. ''The Boxster is a very important step for our company,'' proclaimed Wiedeking. ''A
company can't survive just by cost-savings. You also need good products.''
At around $ 45,000 out the dealer's door, the new roadster is extremely affordable, at least by Porsche standards. Yet it lives
up to the company's high-performance image. Completely new from the ground up, the sleekly styled Boxster is powered by
an aluminum, 24-valve 2.5 liter flat-six engine (the design is the source of the car's odd name) pumping out 201 horsepower.
Stomp on the gas and the roadster will race from 0 to 60 in a neck-snapping 6.7 seconds. Top speed is 149 mph.
Initial reviews have been extremely positive, with Car & Driver magazine crowing, ''The Boxster is pure, taut and sparkling
with desirability.''
Customers apparently agree, even before they've have a chance to drive the car. The Boxster's first year of production is
already sold out, according to Wiedeking. And he insists the company will have no problem maintaining volume of 15,000
units a year. The U.S. is expected to be Boxster's biggest export market, accounting for a third of sales, roughly equal to the
volume projected for Germany. While some skeptics worry the new car might cannibalize sales of the more expensive 911,
Porsche officials expect to draw up to 90% of the new car's volume from competitors - or owners of older Porsches who
were priced out of the market.
''There are those who bought 911s in the mid 1980s at around $ 32,000, who can't afford one today at $ 63,000,''
acknowledges Schwab, President of Porsche Cars North America.
While the 911 is typically used as a weekend plaything by its affluent owners, the Boxster is expected to serve as the only
car for many owners. And it also is expected to attract about 20% female buyers, double the rate for the 911.
Porsche's forecasts might seem a bit optimistic in light of current market realities.
Demand for sports cars, particularly in the vital U.S. market, has all but dried up in recent years. And as sales have slipped,
a procession of long-lived Japanese nameplates have pulled up stakes. Gone are the Nissan 300zx and the Mazda RX-7.
Yet at the same time, the Germans have re-entered this market niche with a vengeance. BMW has barely been able to keep
up with demand for the Z3 roadster it introduced last year following a splashy tie-in to the latest James Bond film,
''Goldeneye.'' An updated model of the Z3, with a larger, faster engine, is just going on sale.
Then there's Mercedes, which took the wraps off its SLK roadster last fall. The car has been a smash in Europe and it's
expected to meet strong demand in the U.S. as well following its North American introduction in Detroit. The price starts at $
40,000.
General Motors is back, too. It came close to killing off the once-coveted Chevy Corvette three years ago. But after some
soul-searching -and cost-cutting - it has completely reengineered the Vette. According to initial reviews, the new car is a
clear rival to the new European sports cars.
Despite all the new competition, auto analyst Joe Phillippi, of Lehman Brothers, is bullish about the Boxster - and the other
new European two-seaters.
''There's heritage to companies like BMW, Mercedes-Benz and Porsche,'' Phillippi said. ''You don't get that from Nissan,
Toyota or Honda.''
The Sports Car Market in the 1980’s
Times have certainly been tough for Porsche. Worldwide volume peaked at nearly 50,000 in 1986, with 60% in the U.S. But three years later,
the market collapsed. And by the time the company hit bottom U.S. sales had fallen below 3,000.
Demand for sports cars, particularly in the vital U.S. market, has all but dried up in recent years. And as sales have slipped, a procession of
long-lived Japanese nameplates have pulled up stakes. Gone are the Nissan 300zx and the Mazda RX-7. Yet at the same time, the Germans
have re-entered this market niche with a vengeance. BMW has barely been able to keep up with demand for the Z3 roadster it introduced last
year following a splashy tie-in to the latest James Bond film, ''Goldeneye.'' An updated model of the Z3, with a larger, faster engine, is just going
on sale.
$/unit
Firms exiting
Price
MC
S1
ATC
A
P1
A
AVCNissan, Mazda, Toyota
Long-run
supply
P1
AVCPorsche
P2
D1
0
q1
Quantity
(firm)
0
Q1
Quantity
(market)
The Sports Car Market in the 1990’s
At around $ 45,000 out the dealer's door, the new roadster is extremely affordable, at least by Porsche standards. Yet it lives up to the company's highperformance image. Completely new from the ground up, the sleekly styled Boxster is powered by an aluminum, 24-valve 2.5 liter flat-six engine (the design is
the source of the car's odd name) pumping out 201 horsepower. Stomp on the gas and the roadster will race from 0 to 60 in a neck-snapping 6.7 seconds. Top
speed is 149 mph.
Initial reviews have been extremely positive, with Car & Driver magazine crowing, ''The Boxster is pure, taut and sparkling with desirability.''
Customers apparently agree, even before they've have a chance to drive the car. The Boxster's first year of production is already sold out, according to
Wiedeking. And he insists the company will have no problem maintaining volume of 15,000 units a year. The U.S. is expected to be Boxster's biggest export
market, accounting for a third of sales, roughly equal to the volume projected for Germany. While some skeptics worry the new car might cannibalize sales of the
more expensive 911, Porsche officials expect to draw up to 90% of the new car's volume from competitors - or owners of older Porsches who were priced out of
the market.
$/unit
Price
MC
New firms entering
S
P2
ATC
A
A
P1
Long-run
supply
P1
AVCPorsche
D1
0
q1
Quantity
(firm)
0
Q1
Quantity
(market)
The Detroit News
December 08, 1996, Sunday
HEADLINE: How Porsche revived itself
BODY: From "Lean Thinking" by James P. Womack and Daniel T. Jones. Copyright 1996 by James P. Womack and Daniel T.
Jones. Reprinted by permission of Simon & Schuster Inc.
On July 27, 1994, something remarkable happened in the assembly hall of Porsche AG in Stuttgart, Germany.
A Porsche Carrera rolled off the line with nothing wrong with it. The army of blue-coated craftsmen waiting in the vast
rectification area could pause for a moment because, for the first time in 44 years, they had nothing to do.
This first perfect Porsche -- and there have been many more since -- was a small but highly visible milestone in the efforts of
Chairman Wendelin Wiedeking and his associates to introduce lean thinking into a veritable industrial institution -- indeed, into
one of the great symbols of the German industrial tradition.
The Porsche company was founded in 1930 by Ferdinand Porsche, the legendary Austrian engineer who subsequently
designed the Volkswagen Beetle.
At the end of the World War II, the large firms Porsche had consulted were in ruins and demand for automobiles was severely
depressed by postwar economic chaos. Nevertheless, the young Ferry Porsche made plans to continue the engineering
consultancy and begin manufacturing cars carrying the Porsche name. By the mid-1980s, Porsche had become spectacularly
profitable as its products became an essential possession of young entrepreneurs and investment bankers making large sums
in the worldwide economic boom of the Reagan era and the Japanese Bubble Economy. A snapshot of Porsche in the years
up to the late 1980s shows a classic German model of successful industrial capitalism, especially of a successful "Mittelstand,"
mid-sized engineering firms. Control of the company was continued firmly in family hands into the third generation.
Management passed into professional hands in 1972.
A second feature marking Porsche as a classic German firm was the intense focus on the product itself, its superior
performance being the firm's most important concern. Porsche also marked its German pedigree with an organization that was
steeply hierarchical. Activities needing the input of many departments typically proceeded by passing the work -- a design, an
order, a physical product -- from one department to the next, usually with delays.
The Porsche supply base was yet another typical feature of German industry. By the late 1980s, the firm had 950 suppliers,
even though Porsche made many of its parts itself.
Porsche was primarily interested in the contribution of purchased parts to the performance of the car, not in their cost,
reliability of deliveries, or the percentage of defects. Porsche would maintain a vast warehouse to guard against supply
disruptions. Perhaps the most striking feature of Porsche in the late 1980s was its craft culture, which went far beyond the
norms of Mercedes and the other big German industrial firms. Porsche's craftsmen were organized in hierarchical layers,
just like the rest of the organization. Primary workers reported to "gruppen meisters" (work group leaders), who reported to
"meisters" (foremen), who reported to "ober meisters" (group foremen) in each work area.
Porsche management stressed long work cycles. In the early years, it was even possible for one worker to assemble a
whole engine and sign it.
Unfortunately, much of this craft work was "muda" -- waste in Japanese. The factory was not closely involved in designing
the product, so Porsche designs were high on performance but very low on manufacturability.
It also was accepted that many parts from suppliers would be defective, late and might even be the wrong part altogether. In
the late 1980s, 20 percent of all parts arrived more than three days late, 30 percent of deliveries contained the wrong
number of parts and 10,000 parts in every million were defective and unusable. By contrast, Toyota Motor Corp.'s first-tier
suppliers in Japan deliver about five defective parts per million and make 99.96 percent of deliveries exactly on time with
exactly the right number of parts. Once the moving assembly track was installed in 1977, the operating philosophy was to
quickly put all of the parts on the car, then test them as a system after the car rolled off the line and to rectify errors in a
highly skilled troubleshooting process that eventually produced a product with a world-class low level of defects.
This approach was also applied further down the product development system, where manufacturing engineers took product
designs and either figured out how to make them or secretly re-engineered them. Even worse, as anyone owning a Porsche
has learned, there was practically no attention to serviceability because the voice of the service bay was simply not
represented in the system. A whole new skilled trade was created around the world, the Porsche mechanic.
Vulnerability crisis
Porsches offered truly superlative performance based on a deep technology base and filled a special niche in the market for
true sports cars just tame enough for everyday use. It was difficult for either giant car companies or tiny specialists to
challenge Porsche. Sales volumes were too low for the high-volume car companies to bother with, reaching only 33,000
cars in the peak year for the highest-volume model, the 944, and never exceeding 21,000 for the up-market 911.
However, the firm's special situation also created vulnerabilities. Any model change was truly a "bet-the-company"
proposition, so over time the management erred on the side of caution.
Another critical vulnerability was that a majority of those with the money and desire to buy a Porsche in the 1980s lived
in North America, while practically 100 percent of Porsche's value was created in or near Stuttgart. The boom year of
1986, when Porsche sold a record 50,000 cars (62 percent of them in North America), gave way to nightmare years
from 1987 on as the mark strengthened against the dollar and sales tumbled. By 1992, Porsche was selling only 14,000
cars worldwide and only 4,000 rather than 30,000 in North America.
It seemed essential to cut the costs of production by about 30 percent to address the currency realignment between the
dollar and the mark, yet no one inside the company seemed up to the task. The solution was soon found in 38-year-old
Wendelin Wiedeking, the chairman of Glyco, a German auto parts maker who had been manager of the paint and body
shop at Porsche ten years earlier. Cost is basic problem
Wiedeking arrived at Porsche in October 1991 as the sales slide was steepening and earnings were slipping from a
meager $ 10 million profit in fiscal 1990-91 toward a loss of $ 40 million in fiscal 1991-92 on $ 1.5 billion in sales. It was
also just at the time that the Japanese car companies were launching their attack on German luxury cars.
However, Porsche's problem was not primarily Japanese clones because even the "sportiest" Japanese cars, like the
Toyota Supra and the Nissan 300ZX, were still several notches away in the direction of touring cars from Porsche's
pure "drivers' cars." Porsche's fundamental problem was cost -- its cars were simply too expensive for 1990s buyers to
afford.
Wiedeking arranged for an initial study tour in Japan. Upon their return, the team was terribly discouraged. "We could
see that we were far, far behind and we had some general sense about why, but we lacked the techniques to tackle our
productivity and first-time quality problems and we had no priorities. When you are way behind on every competitive
dimension, how do you begin and where?" Just then, at the beginning of 1992, the world recession caught up with sales
of Porsche's up-market cars. Production at Zuffenhausen, which had rebounded in 1990 and 1991, suddenly fell by 23
percent from 26,000 to 20,000 and losses for the company as a whole were suddenly soaring past $ 150 million on only
$ 1.3 billion in total sales.
Despite the growing sense of crisis, Wiedeking continued a series of trips to Japan with shop-floor workers and
members of the Metalworkers Union. He was intensely aware of the insularity of thinking at Porsche and the need to
open the windows. The rank-and-file workforce and the union leaders had never been abroad on study tours and clung
to a belief that all that was wrong at Porsche was a downturn in the market and some bad product decisions.
The plan of attack
As these visits continued, Wiedeking decided in 1992 that he must take bold steps to dramatically reorganize the
company, and that he must get help directly from Japanese experts, a decision he knew would be highly unpopular.
The first step in the campaign was to restructure operations from six layers of managers to four. The number of
managers was reduced by 38 percent by August 1993. At the same time, Wiedeking negotiated with the Porsche
Works Council for a new team structure on the plant floor. Production departments of 25 to 50 employees reporting
through several layers of "meisters" were broken down into two to three teams of eight to ten workers with each
group of teams reporting directly to a single "meister."
Wiedeking's second step was a "quality offensive" to show the workforce the true costs of Porsche's quality practices.
A problem costing one German mark to fix at the spot it happened on the assembly line was estimated to cost 10
marks to fix at the end of the line, 100 marks in the vehicle rectification area at the end of the plant and 1,000 marks
at the dealer under warranty. This came as a revelation to the Porsche workforce, which had simply never looked
downstream from their own work area to see the consequences of their mistakes.
A defect detection and reporting system was instituted so that everyone in every area of production could see
immediately where mistakes were occurring and what was being done about them. The final step in the Wiedeking
offensive was a system called the Porsche Improvement Process. This set monthly and annual targets along four
dimensions: cost, quality, logistics, and motivation. As the training progressed and it came time for the cost centers
and work groups to take decisive steps to achieve their goals, Wiedeking was once more discouraged. He needed to
introduce a total change in the thought process and practices of his craft-oriented workforce. Wiedeking decided that
Porsche needed shock treatment in the form of hands-on improvement activities from the Shingijutsu group he had
met during his study tour of Japan. After several personal visits by Wiedeking and lengthy negotiations to prove
Porsche was serious, Yoshiki Iwata and Chihiro Nakao agreed to take on the task.
Shock troops arrive
As always, Chihiro Nakao's initial foray into Porsche was a theatrical tour de force.
When he arrived for his first visit in the fall of 1992, he insisted that Wiedeking immediately accompany him to the
assembly plant. After walking through the door and looking at the stacks of inventory, he asked in a loud voice:
"Where's the factory? This is the warehouse." Upon being assured that he was indeed looking at the engine
assembly shop, he declared that if this was a factory Porsche obviously could not be making any money. And upon
being told that Porsche was, in fact, losing more money every day, Nakao announced that a drastic improvement
activity must be conducted in engine assembly along with many other places and that these must start immediately,
indeed that day.
This, of course, was not the normal practice at Porsche. Any change in job content and the movement of any machine
needed to be negotiated in advance with the Works Council.
Nor was it the normal practice for a stranger -- a Japanese, no less, who spoke no German and communicated through
an interpreter -- to speak this way to a Dr. Ing. head of production (Ph.D. engineer) in a loud voice in front of the
workforce.
The objective of the first "kaikaku" -- or radical improvement -- in the engine assembly area was very simple: Get rid of
the mountains of inventory and the treasure hunting for parts which occupied a substantial fraction of each assembler's
daily effort. Then make the parts flow from receiving to engine assembly to the final assembly plant very rapidly.
A start had to be made somewhere, so the objective of the first weeklong improvement activity was to cut shelf height in
half from 2.5 to 1.3 meters in order to cut the inventory of parts on hand in engine assembly from an average of twentyeight days to seven and to make it possible for everyone to see everyone else in the shop.
'The defining moment'
As the team formed its plan, a crucial moment arrived. Nakao handed a circular saw to Wiedeking, dressed in the blue
Porsche jumper worn by all production workers, and told him to go down the aisle sawing off every rack of shelving at
the 1.3-meter level. As Manfred Kessler, then the head of the Methods and Planning Department and now the head of
the Supplier Development Group, remembers, "It was the defining moment. Historically, senior management never
touched anything in the plant and no one ever took such drastic actions so directly and quickly."
At the end of the week, there was no longer any place to store twenty-eight days' worth of parts and the effects were
both dramatic and completely visible.
Improvement activities were started in the paint booth, the body welding shop, the engine machining shop, chassis
assembly, and final assembly. On their monthly one-week visits, the Japanese consultants would oversee the efforts of
all six improvement teams beginning with an analysis session on Monday morning and a report to all six teams in the
afternoon on the proposed plan of attack.
Because they had invariably seen the same situation before -- remember that they and other Japanese "sensei" have
been conducting similar exercises every week for nearly thirty years -- they could instantly point out opportunities for
additional improvements going beyond what the team had initially proposed. As Wiedeking commented, "You have to
actually apply lean thinking in real situations to learn to see."
With the six plans agreed upon, the teams went to work -- senior managers, production workers, support staff -- to build
any necessary equipment, move machines, run the new layout, standardize the work and stabilize the whole activity. By
Friday, it was time to summarize the improvements, hear the reports of all six teams, make a list of follow-up activities
required to sustain the improvements (often very long) and celebrate
Efficient Production at Porsche
Under the Craft Culture that prevailed at Porsche before the Japanese, too much labor was used in the production process.
Porsche was at point A.
The Japanese consultants made two changes, they reduced the amount of labor content (elimination of the fix-it area) and increased productivity by
allowing Porsche to produce more cars with the same inputs (Muda elimination and inventory control).
The changes are lower unit costs of production.
$/unit
Price
MC
S
ATCbefore Japanese
A
P1
P2
MC
ATCafter Japanese
A
Long-run
supply
P1
D1
0
q1
Quantity
(firm)
0
Q1
Quantity
(market)