4. INTRODUCTION
Production function: Relates physical output of a production process to
physical inputs or factors of production. marginal cost: The increase
in cost that accompanies a unit increase in output; the partial
derivative of the cost function with respect to output.
5. “Production is any activity whether physical or mental,
which is directed to the satisfaction of other people's
wants through exchange.”
— Prof. J. R. Hicks
6. “The production function is purely a technical relation
which connects factor inputs and output.”
— Prof. Koutsoyiannis
7. basic relationship between inputs andoutputs
Where, Q = Quantity of output
L = Labor
C = Capital
N = Land.
Hence, the level of output (Q), depends on the quantities of different inputs (L, C, N)
available to the firm.
Q = f (L, C, N)
Mathematically, such a basic relationship between inputs and outputs may be
expressed as:
8. Total,averageandMarginalproduct
As the quantity of labor is increased and the
amount of capital that is required to be replaced
by an additional unit of labor has to diminish in
order to maintain the output at a constant level.
9. Total,averageandMarginalproduct
TotalProduct
Total product is also known as the total physical product
It is the total quantity of output produced by a firm in the given inputs.
It identifies the specific outputs which are possible using variable levels of counts.
It is essential for the short-run analysis of a firm's production.
Changes in total product are taken into account closely when there are changes in variable
costs (labor) of production.
10. Total,averageandMarginalproduct
• The ratio of total production to the total quantity of an
input used to produce the product. The total
product per unit of the variable factor.
•It is defined as the output per unit of factor inputs or the
average of the total product per unit of input and can be
calculated by dividing the Total Product by the inputs
(variable factors).
Average Product = Total Product/ Units of Variable
Factor Input
AverageProduct
11. Total,averageandMarginalproduct
MarginalProduct
• Is similar to an average product but is looked at from another perspective.
• Discrete marginal product is defined as the change in the total product that comes as a result of a one-unit
increase in the variable input/capital level of a firm.
• Continuous marginal product is calculated as the derivative of total product with respect to the variable input
employed.
Marginal Product = Change in Output/ Change in Input
Thus, it can also be said that Total Product is the summation of Marginal products at
different input levels.
Total Product = Ʃ Marginal Product
12. Analysisof Costs
In economics, the Cost Analysis refers to the
measure of the cost output relationship, i.e. the
economists are concerned with determining
the cost incurred in hiring the inputs and how well
these can be re-arranged to increase the
productivity (output) of the firm.
Total Costs
Variable Costs
Fixed Costs
Units
13. AnalysisofCosts
In economics, the total cost (TC) is the
total economic cost of production. It
consists of variable costs and fixed costs.
Total cost is the total opportunity cost of
each factor of production as part of its fixed
or variable costs.
03
VariableCosts
01
TotalCost
04
FixedCosts
Variable cost (VC) changes according to
the quantity of a good or service being
produced. It includes inputs like labor and
raw materials. Variable costs are also the
sum of marginal costs over all of the units
produced
Fixed costs (FC) are incurred
independent of the quality of goods or
services produced. They include inputs
(capital) that cannot be adjusted in the
short term, such as buildings and
machinery.
02
Calculatingtotalcost
This graphs shows the relationship
between fixed cost and variable cost.
The sum of the two equal the total cost.
Marginal cost is the change in total
cost when another unit is produced;
average cost is the total cost divided
by the number of goods produced.
06
MarginalCost
05
AverageandMarginalCost
In economics, marginal cost is the
change in the total cost when the
quantity produced changes by
one unit. It is the cost of producing
one more unit of a good.
14. RelationshipBetweenAverageandMarginalCost
Average cost and marginal cost impact one
another as production fluctuate:
• When the average cost declines, the
marginal cost is less than the average
cost.
• When the average cost increases, the
marginal cost is greater than the average
cost.
• When the average cost stays the same
(is at a minimum or maximum), the
marginal cost equals the average cost
Cost curve: This graph is a cost curve that shows the average total
cost, marginal cost, and marginal revenue. The curves show how each
cost changes with an increase in product price and quantity produced.
15. Long run costs have no fixed factors
of production, while short run costs
have fixed factors and variables that
impact production.
In economics, “short run” and “long
run” are not broadly defined as a rest
of time. Rather, they are unique to
each firm.
ShortRun and LongRunCosts
16. Long run costs are accumulated when firms
change production levels over time in response to
expected economic profits or losses. In the long
run there are no fixed factors of production. The
land, labor, capital goods, and entrepreneurship
all vary to reach the long run cost of producing a
good or service
Short run costs are accumulated in real time
throughout the production process. Fixed costs
have no impact of short run costs, only
variable costs and revenues affect the short
run production. Variable costs change with the
output.
LongRun Costs ShortRun Costs
The main difference between long run and short run costs is that there
are no fixed factors in the long run; there are both fixed and variable
factors in the short run. In the long run the general price level,
contractual wages, and expectations adjust fully to the state of the
economy.
Differences
ShortRunandLongRunCosts
17. The costs of production are the
best basis for determining the
selling price. The selling price
should always be higher than the
costs; the difference between
costs and selling price is known
as profit. The higher the selling
price, the higher the profit and
the greater your gain.
CONCLUSIONS
Production&Cost
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