RC Plus Two Economics Chapter-3 Production And Cost
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4. PRODUCTION FUNCTION
• Production function
is the functional
relationship
between factor
inputs and output.
Inputs are land,
labour, capital, and
organisation.
5. THE SHORT RUN
• Short run is the
period in which the
firms cannot vary all
inputs.
• In the short run there
are variable inputs
and fixed inputs.
• Long run is the
period in which the
firms can vary all
inputs.
• In the long run all
inputs are variable.
THE LONG RUN
THE SHORT RUN & THE LONG RUN
6. Total Product
(TP)
Total Physical Product
(TPP)
It is the total output
produced by variable
input.
Average Product
(AP)
Average Physical Product
(APP)
It is the output per unit
of variable input.
Algebraically,
AP = TP ÷ x1 where x1 is
the amount of variable
input.
Marginal Product
(MP)
Marginal Physical
Product (MPP)
It is the addition made
to total product through
the addition of one more
variable input.
MP = ΔTP ÷ Δx1
7. TABLE 0F TP, AP AND MP
Labour TP MP AP
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
12. THREE STAGES OF PRODUCTION
STAGE 1
• TP ….. Increasing at an increasing rate. Then increasing at a diminishing
rate.
• AP……. Increasing and at the end of the first stage reaching the maximum.
• MP……,. Increasing, reaching the maximum then declining.
STAGE 2
STAGE 3
13. THREE STAGES OF PRODUCTION
STAGE 1
STAGE 2
• TP……increasing at a diminishing rate, then reaching the
maximum.
• AP……AP cuts MP curve from below, then declining.
• MP……MP declining and becomes zero.
STAGE 3
14. THREE STAGES OF PRODUCTION
STAGE 1
STAGE 2
STAGE 3
• TP…..Declining,but never be zero or negative.
• AP…,.Declining,but never be zero or negative.
• MP…..Negative.
16. RETUNS TO SCALE
Constant Returns to Scale (CRS)
Increasing Returns to Scale (IRS)
Decreasing Returns to Scale (DRS)
17. WHEN ALL INPUTS VARY
SIMULTANEOUSLY
CRS
• Increase in all inputs results in an increase
in output by the same proportion.
IRS
• Increase in all inputs results more than
proportionate increase in output.
DRS
• Increase in all inputs results less than
proportionate increase in output.
23. TOTAL COST
• It is the total of all
expenses incurred by the
producer.
• It is the sum of Total Fixed
Cost and Total Variable
Cost.
• TC=TFC +TVC
• Shape of TC curve
24. TOTAL FIXED COST
• It is the total cost incurred by the
producer for the purchase of fixed
inputs.
• TFC=AFC×q
• It is the total cost incurred by
the producer for the purchase
of variable inputs.
• TVC=AVC×q
TOTAL VARIABLE COST
TOTAL COST
25. THE SHORT RUN AVERAGE COST
• It is defined as the total cost per unit of
output.
• SAC=TC÷q or AC=AFC+AVC
26. AVERAGE VARIABLE COST
• It is defined as the total variable
cost per unit of output.
• AVC=TVC÷q
• It is the fixed cost per unit of output
produced.
• The shape of AFC curve is a rectangular
hyperbola.
• AFC=TFC÷q
AVERAGE FIXED COST
THE SHORT RUN AVERAGE COST
27. THE SHORT RUN MARGINAL COST
• It is defined as the change in total cost
per unit of change in output.
• MC=∆TC÷∆q
28. RELATIONSHIP BETWEEN AVC AND MC
• AVC and MC initially fall and later rise.
• When AVC falls, MC will be less than AVC.
• When AVC rises, MC will be more than AVC.
• When AVC is minimum, MC=AVC.
• MC cuts AVC at the minimum point.
30. LONG RUN AVERAGE COST
• It is defined as cost per
unit of output.
• LRAC=TC÷q
• It is the change in total cost per
unit of change in output.
• LRMC=TC÷q
LONG RUN MARGINAL COST
LONG RUN COST
31. RELATION BETWEEN LAC AND LMC
• Both LRAC and LRMC are the same.
• Both are 'U’ shaped.
• LRMC curve cut the LRAC curve from
below at the minimum point of LRAC.
