This document explains fundamental economic concepts related to the production function, the law of variable proportions, and the distinctions between fixed and variable factors of production. It also covers total revenue in a perfectly competitive market, average revenue, fixed and variable costs, and the concept of marginal cost with examples. Additionally, it addresses the use of arithmetic mean in economic data analysis.

1. Revision
Class XI

2. Production function
• 1. Explain the concept of the production function with an example.
• Answer: The production function shows the relationship between input (like labor, capital) and
output. For example, if 1 worker produces 10 units and adding another worker produces 15 more
units (total 25), the function shows how output changes with different input levels.
• 2. What is the law of variable proportions? Provide an example
• Answer: This law states that if we increase one input (like labor) while keeping others constant
(like machinery), the output first increases at an increasing rate, then at a diminishing rate, and
finally may decrease. For example, in farming, adding more labor to a fixed piece of land increases
crop yield initially, but after a point, yield increases at a slower rate, and eventually might even
decreases.

3. Law Of Variable Proportions
Fixed Factor
(Land in Acres)
Variable factor
(Labour)
TP
(units)
MP
(units)
Phase
1
1
1
2
10
30
10
20
Phase I: Increasing Returns to a Factor
1
1
1
3
4
5
45
52
52
15
7
0
Phase II: Decreasing Returns to a
Factor
1 6 48 -4 Phase III: Negative Returns to a Factor

4. 3. What are fixed and variable factors of production? Give
examples.
Answer: Fixed factors are those that remain unchanged as
output changes, like land or machinery. Variable factors change
with output, like raw materials or labor. For example, in a
factory, machines are fixed, while workers' hours (variable)
change based on demand.

5. Revenue
What happens to total revenue in a perfectly competitive market if the firm sells more
output? Explain with an example.
Answer: In a perfectly competitive market, selling more output does not change the price,
so TR increases proportionally with quantity. For example, if the price is fixed at $10 and
the firm sells 10 units, TR = 10 × $10 = $100. Selling 20 units makes TR = 20 × $10 = $200.
Why is average revenue equal to price in a perfectly competitive market?
Answer: In a perfectly competitive market, each unit of output is sold at the same price, so
average revenue (AR) per unit is the same as the price. For example, if the price is $15 and
a firm sells 30 units, AR = Total Revenue / Quantity = (15 × 30) / 30 = $15.

6. Cost
Differentiate between fixed and variable costs with examples.
Answer: Fixed costs do not change with output, like rent. Variable costs vary with output, like raw materials.
For instance, a bakery’s rent remains the same whether it bakes 100 or 200 loaves, but the cost of
ingredients increases with more bread production.
Explain the concept of marginal cost with an example.
Answer: Marginal cost (MC) is the cost of producing one additional unit. For instance, if producing 5 chairs
costs $100 and producing 6 costs $115, the MC for the 6th chair is $15.

7. When is it appropriate to use the arithmetic mean in economic data?
Give an example.
Answer: The arithmetic mean is used to find average values in uniform
data sets. For example, to find the average income of households in a
city, arithmetic mean is suitable as it gives a central tendency.
If the income of three employees are $10, $20, and $30, calculate the
arithmetic mean Income.
Answer: Mean income = (10 + 20 + 30) / 3 = $20.