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# Production Theory

## on Oct 03, 2008

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Micro Economics

Micro Economics

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## Production TheoryPresentation Transcript

• Production Theory
• Production
• Creation of U in a certain G or S as a result of which it commands P in the market
• Production Function
• P.F is a schedule or mathematical equation that gives max quantity of output that can be produced from specified sets of input while techniques of production are given
• P = F (A, B, C, D)
• Production Unit :-
• A unit where four factors of Production are combined to produce Goods or Services
• Firm :-
• An exact body that own or controls Production of 1 or more G & S
• Industry :-
• Group of Production units / Firms producing same product
• Firm Product, Cost & Revenue
• Firm has to make 3 decisions:-
• (i) How much to P ?
• (ii) What will be total cost of Production ?
• (iii) How much revenue will be obtained ?
• Decisions carefully taken to obtain max profit
• PROFIT = TR - TC
• Total Product (TP) :-
• Having employed certain no of L, what so ever is produced by firm
• Average Product (AP) :-
• Dividing TP by unit of L
• AP = TP
• L
• Marginal Product (MP)
• Addition to total output that results by employment of additional L
• MP = Q = d Q
• L d L
• MP give slope of TP
• Firm Cost
• TC
• AC
• MC
• TC
• TFC => cost borne ever if firm isn’t operating
• TVC => bears regarding valuable factor of Production
• TC = TFC + TVC
• e.g.
• for 100 units
• TC = TFC + TVC
• = 6000 + 8000
• = 14000
• AC
• Cost per unit [ cost divided by unit ]
• AC = AFC + AVC
• e.g.
• AFC = TFC = 6000 = 60
• Q 100
• AVC = TVC = 8000 = 80
• Q 100
• AC = 60 + 80 = 140
• MC
• Net change TC by having produced additional units of any G
• MC = d TC
• d Q
• e.g. Q TC
• 100 1200
• 101 1210
• d TC = 10 = 10
• d Q 1
• Firm Revenue
• TR :-
• Obtained by combining sale of all units
• e.g. 100 units , 5 Rp each
• TR = 5 x 100 = 500
• Firm Revenue
• AR :-
• Dividing TR by units of output sold
• TR = 500 = 5
• Q 100
• Firm Revenue
• MR :-