Input-Output Model

Instructor: Brianna Whiting
Companies need to meet the demands of their customers. This means not only being able to understand what they want and need, but also being able to use incoming factors to make the products. In this lesson, we will learn all about this relationship known as an input-output model.

A Beginning Look at Input-Output

Meet Callie! Callie has decided to start her own business making jewelry. She starts out by doodling some sketches of the kinds of bracelets and necklaces she wants to make. She then finds a small office space to rent, so that she has enough room to store her supplies and plenty of room to transform her creativity into a finished piece.

At first, she starts buying her beads at the local craft store, but as the orders increase, she realizes that the craft store doesn't have the quantity or the variety she needs to keep up with the orders that keep pouring in. Callie realizes that she needs to find somewhere else to get her beads so that she can keep producing her mass orders of jewelry. You see, what Callie needs to learn about is input and output, which is the relationship between factors needed to supply goods so that one can produce a final product.

Foundation Definitions

Let's begin by looking at some basic definitions. Input is the process of taking something in. For example, when a company takes in a raw material to make a finished good, they are receiving an input. Output is the exact opposite, in that it is the process of sending something out. When a company finishes a product, they might ship it to a customer, which would be an output. Therefore, the input-output model shows the relationship between the elements needed to come into a company to make products, and the actual final goods that are produced as a result of those inputs.

For example, some inputs might be money, supplies or knowledge, or labor. All of these elements are needed by a company to make products. An example of an output might be a finished good or a service a company can offer because of the inputs they receive. The input-output model closely follows consumer demand because as demand goes up for a product, the amount of products needed goes up as well. This means more supplies, labor, and money will be needed to make more products.

Importance of Model

Because consumer demand often changes, the input-output model helps a company identify shortages or surpluses in products. A shortage is when there is not enough of a product to meet the demand of consumers. A surplus, however, is the exact opposite. So, the input-output model aids a company in determining what needs to come in to produce enough output to meet the needs and wants of the consumer.

For Callie, the craft store has a shortage of the beads that she is demanding; therefore, she needs to find another supplier that can provide her with the beads she needs. The beads are the supplies, or inputs, she needs so that she can produce an output, which is her jewelry.

Example

Let's now apply the input-output model to an example to further concrete our knowledge.

Take Callie again. Let's say that her business is taking off so much that she needs to hire some help. She first places an ad in the newspaper, and several interested people send their resumes. From those resumes, Callie picks those individuals that meet the qualifications and who she feels would be great at the job. After a few short interviews, the employees are chosen and they begin work.

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