Factor of production, law of Returns, production of Cost, Revenue and product.

1. Theory of Firm
Presenters Name & Roll No
Ikram Sabir (20014119-014)

2. Factor of Production
Presented By:
Hannan Khalid
20014119-026

3.  Factors of Production:
Factors of Production are the
resources used to produce goods and services. These resources
are also called inputs.
There are FOUR factors of production.
• Land
• Labour
• Capital
• Enterprise/Entrepreneurship

5. What is Land?
All the naturally occurring resources (gifts of nature).
Land is also called natural resources.
It includes resources found:
• in the air
• in the land (gold)
• on the land (forests)
• The payment for land is Rent.

6.  Types Of Land Resources:
● Renewable Resources are resources that can be
replenished, such as water, vegetation, wind energy, and
solar energy.
●
Non-Renewable Resources consist of resources that
can be depleted in supply, such as oil, coal, and natural
gas.

7. What is Labour?
All human effort, whether mental or physical that contributes to
production. Labour is also called human resources. Examples
nurses, soldiers, teachers. The payment for labour is called
wages.
Types of Labor :
• Unskilled
• Semi-skilled
• Skilled
• Professional

8. What is Capital?
Capital refers to all man-made resources. It is
used in the production process. The payment for the use of capital
is called interest. Examples include machinery & Equipment.
Types of Capital
• Fixed
• Working
• Venture

9. What is Enterprise?
This is the ability to combine or organize. The other factors
of production and to take risks. It is also called
entrepreneurship. The Reward for enterprise is profit.
● Characteristics:
• He has imagination.
• He has great administrative power.
• An entrepreneur must be a man of action.
• He should be a knowledgeable person.
• He must have a professional approach.

10. Law Of Returns
Presented By:
Ikram Sabir
200141119-014

11. WHAT IS LAW OF RETURNS?
● The law of returns operates in the short period. It explains the
production behavior of the firm with one factor variable while
other factors are kept constant.
● It is implied in the fact that the quantitative definiteness of the
effects brought about by any economic good is a necessary
condition of its being an economic good.

12. TYPES OF LAW OF RETURNS:
The laws of returns are categorized into two types.
● The law of variable proportion seeking to analyze
production in the short period.
● The law of returns to scale seeking to analyze production
in long period.
Three stages of the law:
● Increasing returns
● Constant returns
● Diminishing returns

13. ● Stage of increasing return– In this stage as a variable
resource (labor) is added to fixed inputs of other
resources, the total product increases up to a point at an
increasing rate as shown in graph.

14. Stage of diminishing return – In stage 2, the total production
continues to increase at a diminishing rate until it reaches its
maximum point (H) where the second stage ends .In this stage
both marginal product (MP) and average product of the variable
factor are diminishing but are positive.

15. Stage of negative returns
In the third stage, the total production declines. The TP,
curve slopes downward ( from point H onward) . The MP
curve falls to zero at point L2 and then it is negative. It goes
below to the x-axis with the increase
in the use of variable factor (labor).

16. Law Of Returns to Scale
Presented By:
Syed Ali Murtza
200141119-021

17. LAW OF RETURNS TO SCALE
● The law of returns to scale operates in the long period. It
explains the production behavior of the firm with all
variable factors.
There are three types of Returns to Scale. They are:
● Increasing returns to scale
● Constant returns to scale
● Diminishing returns to scale

18. ● INCREASING RETURNS TO SCALE: If the output of a
firm increases more than in proportion to an equal
percentage increase in all inputs, the production is said to
be exhibit increasing returns to scale.

19. DIMINISHING RETURNS TO SCALE: The term ‘diminishing’
returns to scale refers to scale where output increases in a smaller
proportion then the increase in all inputs.
For example, if a firm increases
inputs by 100% but the output
decreases by less than 100%,
the firm is said to be exhibit
decreasing returns to scale.

20. CONSTANT RETURNS TO SCALE:
When all inputs are increased by a certain percentage, the output
increases by the same percentage, the production function is said
to be exhibit constant returns to scale.

21. TOTAL PRODUCT, AVERAGE PRODUCT
AND MARGINAL PRODUCT
MUHAMMAD BILAL
20014119-022

22. TOTAL PRODUCT
• Total product (TP) is the total quantity of goods or services
produced by a firm with the given input during a specific period
of time.
• Total product (TP) will be helpful to elucidate the concepts of
average product (AP) and marginal product (MP).
• Total product (TP) is the total output produced by a firm using a
given quantity of inputs, such as labor

23. AVERAGE PRODUCT
● Average product is the amount of output produced
per unit of a variable factor during time period.
● The average product is the total product divided by
the total amount of inputs used in production.
● Average product = Total product / Total inputs used

24. MARGINAL PRODUCT
● The marginal product is the change in total product due
to the change in employing one extra unit of a variable
factor.
● Marginal product = Change in total output / Change in
quantity of input used

25. TOTAL PRODUCT
MARGINAL PRODUCT
AVERAGE PRODUCT
Labour TP MPL APL
0 0 – –
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5

27. Cost of Production
Total,Average and Marginal Cost.
SYED ZAIN UL ABADIN
20014119-007

28.  Introduction to Cost of Production
• Fixed Cost
• Variable Cost
• Total Cost
• Average Costs
• Marginal Costs
• Relationship between Total, Average, and Marginal Costs
• Conclusion

29. Introduction to Cost of Production:
● Cost of production is the total cost incurred by a business
to produce goods or services.
● It includes all expenses, such as materials, labor,
overhead, and other
● Total, average, and marginal cost are three important
concepts that help businesses understand and analyze their
production costs.

30. ● Variable Costs:
Variable costs are expenses that change with production
volume; these costs rise when production increases and
fall when it decreases. Variable costs include things like
utilities, direct labor, raw materials, and commissions.
● Fixed Costs:
Unlike variable costs, fixed costs do not fluctuate with
production volume. Employee salary, rent, and leased
equipment are some examples of fixed costs of production.

31. Total Costs:
● Total cost is the sum of all costs associated with production.
It includes the cost of labor, materials, and overhead. Total cost
increases as production increases.
● Fixed Cost
● Variable Cost

32. Average Costs:
● Average cost is the total cost divided by the number of units produced.
● Average cost decreases as production increases.
● It is calculated by dividing total costs by the quantity produced.
● There are two types of average costs: average total cost (ATC) and
average variable cost (AVC).
● ATC includes both fixed and variable costs, while AVC only includes
variable costs.

33. Marginal Costs:
● Marginal costs (MC) refer to the additional cost of
producing one more unit of output.
● It is calculated by dividing the change in total costs by the
change in quantity produced.
● If MC is less than price, the business should increase
production. If MC is greater than price, the business should
decrease production.
● Marginal cost decreases as production increases.

34. Relationship Between Total, Average, and
Marginal Costs:
● The relationship between TC, AC, and MC is important for
businesses to understand.
● When MC is below AC, AC is decreasing.
● When MC is above AC, AC is increasing.
● When MC is equal to AC, AC is at its minimum point.
● The minimum point of AC is called the "economies of scale"
point, where the business is producing at the lowest possible cost
per unit.

35. Conclusion:
● Total, average, and marginal costs are important concepts for
understanding production costs. They provide insight into how costs
change as production increases and can be used to make
decisions about pricing and production.
● By understanding total, average, and marginal costs, businesses
can identify inefficiencies and make decisions to reduce costs and
increase profits.

36. Total, Average and Marginal
Revenue
Presented By
Ihtisham Mehmood
20014119-025

37. Total Revenue:
● Total revenue refers to the total amount of money a firm or business
earns from selling its goods or services. It is calculated by multiplying
the price per unit of a product or service by the total number of units
sold.
● For example, if a business sells 1,000 units of a product for $10
each, the total revenue earned would be $10,000 (1,000 x $10).

38. Importance
● Total revenue is an important measure for businesses because it
indicates the overall sales performance and helps to determine
profitability. It can also be used to calculate other important financial
ratios such as the average revenue per unit and the price elasticity
of demand.

39. Average Revenue:
● In economics, average revenue (AR) refers to the revenue earned per unit of
output. It is calculated by dividing the total revenue (TR) earned by the total
number of units sold (Q),
● AR =
𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 𝑠𝑜𝑙𝑑
● AR=
𝑇𝑅
𝑄
● The relationship between average revenue and price is directly proportional,
which means that as the price of a product or service increases, the average
revenue earned per unit also increases.

40. Marginal revenue:
● Marginal revenue (MR) refers to the additional revenue earned
from producing and selling one additional unit of output
● It is calculated by dividing the change in total revenue (ΔTR) by
the change in the quantity of output (ΔQ),
● MR =
TR
Q

41. Relationship between AR and MR Under Perfect
Competition
● when price remains constant, firms can sell any quantity
of output at the price fixed by the market.
● No firm is in a position to influence the market price of
the product.
● A firm can sell more quantity of output at the same
price.
● It means, the revenue of every additional unit (MR) is
equal to AR.

43. Explanation
● As a result, MR curve and AR is a horizontal straight
line parallel the x-axis.
● Since MR remains constant, TR increases at a constant
rate. Due to this reason, the TR curve is positively
sloped straight line.
● As TR zero at zero level of output, TR curve starts from
the origin.

44. AR , MR and TR

45. Relationship between AR and MR Under Imperfect
Competition
(when price falls with increase in output)
● It can be in the form of Monopoly, duopoly or oligopoly.
● Demand curve facing the firm is negatively sloped.
● Under imperfect competition, the behavior of MR is that it
lies below the AR Curve.

47. When firms can increase their volume of sales only by decreasing the
price, AR falls with increase in sale. It means, revenue from every
additional unit (i.e. MR) will be less than AR.
As a result, both AR and MR curve slope downwards from left to
right.
Both MR and AR fall with increase in output. However, fall in MR is
double than that in AR.i.e., MR falls at a rate which is twice the rate
of fall in AR.
MR curve is steeper than AR curve because MR is limited to one
unit, whereas, AR is derived by all units.

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