Production Theory

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Micro Economics

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Production Theory

  1. 1. Production Theory
  2. 2. Production <ul><li>Creation of U in a certain G or S as a result of which it commands P in the market </li></ul>
  3. 3. Production Function <ul><li>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 </li></ul><ul><li>P = F (A, B, C, D) </li></ul>
  4. 4. <ul><li>Production Unit :- </li></ul><ul><li>A unit where four factors of Production are combined to produce Goods or Services </li></ul><ul><li>Firm :- </li></ul><ul><li>An exact body that own or controls Production of 1 or more G & S </li></ul><ul><li>Industry :- </li></ul><ul><li>Group of Production units / Firms producing same product </li></ul>
  5. 5. Firm Product, Cost & Revenue <ul><li>Firm has to make 3 decisions:- </li></ul><ul><li>(i) How much to P ? </li></ul><ul><li>(ii) What will be total cost of Production ? </li></ul><ul><li>(iii) How much revenue will be obtained ? </li></ul><ul><li>Decisions carefully taken to obtain max profit </li></ul><ul><li>PROFIT = TR - TC </li></ul>
  6. 6. <ul><li>Total Product (TP) :- </li></ul><ul><li>Having employed certain no of L, what so ever is produced by firm </li></ul><ul><li>Average Product (AP) :- </li></ul><ul><li>Dividing TP by unit of L </li></ul><ul><li>AP = TP </li></ul><ul><li> L </li></ul>
  7. 7. Marginal Product (MP) <ul><li>Addition to total output that results by employment of additional L </li></ul><ul><li>MP = Q = d Q </li></ul><ul><li> L d L </li></ul><ul><li>MP give slope of TP </li></ul>
  8. 8. Firm Cost <ul><li>TC </li></ul><ul><li>AC </li></ul><ul><li>MC </li></ul>
  9. 9. TC <ul><li>TFC => cost borne ever if firm isn’t operating </li></ul><ul><li>TVC => bears regarding valuable factor of Production </li></ul><ul><li>TC = TFC + TVC </li></ul><ul><li>e.g. </li></ul><ul><li>for 100 units </li></ul><ul><li>TC = TFC + TVC </li></ul><ul><li> = 6000 + 8000 </li></ul><ul><li> = 14000 </li></ul>
  10. 10. AC <ul><li>Cost per unit [ cost divided by unit ] </li></ul><ul><li>AC = AFC + AVC </li></ul><ul><li>e.g. </li></ul><ul><li>AFC = TFC = 6000 = 60 </li></ul><ul><li> Q 100 </li></ul><ul><li>AVC = TVC = 8000 = 80 </li></ul><ul><li> Q 100 </li></ul><ul><li>AC = 60 + 80 = 140 </li></ul>
  11. 11. MC <ul><li>Net change TC by having produced additional units of any G </li></ul><ul><li>MC = d TC </li></ul><ul><li> d Q </li></ul><ul><li>e.g. Q TC </li></ul><ul><li> 100 1200 </li></ul><ul><li> 101 1210 </li></ul><ul><li>d TC = 10 = 10 </li></ul><ul><li>d Q 1 </li></ul>
  12. 12. Firm Revenue <ul><li>TR :- </li></ul><ul><li>Obtained by combining sale of all units </li></ul><ul><li>e.g. 100 units , 5 Rp each </li></ul><ul><li>TR = 5 x 100 = 500 </li></ul>
  13. 13. Firm Revenue <ul><li>AR :- </li></ul><ul><li>Dividing TR by units of output sold </li></ul><ul><li>TR = 500 = 5 </li></ul><ul><li> Q 100 </li></ul>
  14. 14. Firm Revenue <ul><li>MR :- </li></ul><ul><li>Each addition made to TR by sale of extra unit </li></ul><ul><li>Units 101, P = 5 Rp </li></ul><ul><li>TR = 5 x 101 = 505 </li></ul>

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