The document discusses key concepts related to production theory and costs, including: - The production function specifies the maximum output from given inputs. Marginal product is the extra output from an additional input. - The law of diminishing returns states that adding more of one input while holding others fixed will eventually result in lower marginal products. - Cost concepts include total, average, and marginal costs. Marginal cost is the change in total cost from an additional unit of output. Average costs have a U-shaped curve. - In the short run, at least one input is fixed, while in the long run all inputs can be adjusted.

2. Theory of Production &Marginal
Products
• Production function :specifies the
maximum output that can be produced with a
given quantity of inputs .
• Total Product : is the total amount of
output produced in physical units such as,
bushels of wheat .
• Average Product: it equals total output
divided by total units of inputs.
• Marginal product of an input : the extra
output produced by 1 additional unit of that
input while other inputs are held constant .

3. Ex,,
The table calculates
the marginal product
. The marginal
product of labor
starts at 2000 for the
first unit of labor and
then falls to only 100
units for the fifth
unit.
Marginal product
calculations such as
this are crucial for
understanding how
wages and other
factor prices are
determined.

4. Law of diminishing returns: it
states that a firm will get less & less
extra output when it adds additional
units of an input while holding other
inputs fixed.
-This law is a key factor in explaining
why many countries in Asia are so poor .
Because there are so many workers per
acre of land.

5. Diagram( a) shows the total product curve rising as
additional inputs of labor are added holding other things
constant . However, total product rises by smaller
increments as additional units of labor are added
(compare the increments of the first and the fifth worker).

6. Returns to Scale :
• Diminishing returns and marginal products
refer to the response of output to an increase
of a single input when all other inputs are
held constant .
• But sometimes we are interested in the effect
of increasing all inputs , this refers to returns
to scale.

7. • There are three important cases should be
distinguished :
• 1- Constant Returns to scale : a case
where a change in all inputs leads to a
proportional change in output .
• 2- Increasing Returns to Scale"
economies of scale” : when an increase in
all inputs leads to a more- than –proportional
increase in the level of output .
• 3- Decreasing Returns to scale: it occurs
when a balanced increase of all inputs leads
to a less-than proportional increase in total
output .

8. Important Production Concepts:

9. Short Run & Long Run
• Short run : it is a period in which firms can
adjust production by changing variable
factors such as materials and labor but
cannot change fixes factors such as capital .
• Long Run : is a period sufficiently long that
all factors including capital can be adjusted.

10. Technological change:
We distinguish between:
• process Innovation , which occurs when
new engineering knowledge improves
production techniques for existing products
• Product Innovation , whereby new or
improved products are introduced in the
market place
• The technological change in the form of a
process innovation , would shift the total
product curve .

12. • Productivity : is a concept measuring the
ratio of total output to a weighted average of
inputs
• Labor productivity : it calculates the amount
of output per unit of labor
• Total factor productivity : it measures output
per unit of total inputs (typically of capital
and labor)
• When output is growing faster than inputs ,
this represents “productivity growth”
• Economies of scope , occurs when a number
of a different products can be produced
more efficiently together than apart .

13. Multiple Choice Questions
A "production function" is the name for:
A) a working part.
B) a relationship between inputs and output.
C) technological change.
D) all of the above.
E) none of the above.
Answer: B

14. 2. If you owned a wheat farm and
employed 10 workers then decided to
hire another worker, the additional
worker’s output is considered:
A) total output.
B) marginal product.
C) average product.
D) production function.
E) none of the above.
Answer: B

15. 3. The marginal product of labor is the:
A) output which it could produce unaided by
machinery or other factors of production.
B) extra revenue which a firm will get by selling the
output of one additional worker.
C) amount of extra output that is produced when
one extra worker is added to a fixed amount of other
factors.
D) amount of extra output that is produced when
one worker is added and other
factors of production are increased
proportionately.
E) none of the above.
Answer: C

16. 4.The production function specifies which of
the following:
A) relates dollar inputs to dollar outputs.
B) indicates the best way to combine
outputs in the marketplace.
C) indicates the best level of output to
produce.
D) describes a relationship between inputs
and output in a production process.
E) relates marginal products to factor prices.
Answer: D
Difficulty: Easy

17. 5.The law of diminishing marginal
returns shows us which of the
following:
A) the marginal product of each unit of
input will decline as that input
increases and other inputs remain
constant.
B) the marginal product of labor just
equals the marginal utility of leisure.
C) more workers employed in a plant
will talk more and produce less.
D) total product must eventually fall.
E) returns to scale are diminishing.

18. 6.If you hire an additional worker for your
farm and you don’t buy more land or
tools, which of the following would
explain why this worker’s marginal
product is less:
A) law of farming.
B) law of production function.
C) law of diminishing returns.
D) law of economics.
E) none of the above.
Answer: C

19. 7. Average product of labor measures:
A) the addition to total output when an
additional worker is hired.
B) total product divided by total cost.
C) the marginal product of the last
worker multiplied by the wage rate.
D) total product divided by the wage
rate.
E) total product divided by the quantity
of labor.
Answer: E

20. 8-The law of diminishing returns is
expressed in terms of an eventual
decline in the:
A) total product of an input.
B) average product of an input.
C) marginal product of an input.
D) returns to scale of an input.
E) broadest general productivity
measures only.
Answer: C

21. 9-If we increase all of our inputs on the
farm and we get a proportional
increase in output, this is an example
of which of the following:
A) Increasing returns to scale.
B) Constant returns to scale.
C) Decreasing returns to scale.
D) Normal returns to scale.
E) none of the above.
Answer: B

22. 10-If we increase all of our inputs on the
farm and we get a decrease in output,
this is an example of which of the
following:
A) Increasing returns to scale.
B) Constant returns to scale.
C) Decreasing returns to scale.
D) Normal returns to scale.
E) none of the above.
Answer: C

23. 11-If we increase all of our inputs on the
farm and we get a more-than-
proportional increase in output, this is
an example of which of the following:
A) Increasing returns to scale.
B) Constant returns to scale.
C) Decreasing returns to scale.
D) Normal returns to scale.
E) none of the above.
Answer: A

24. 12-Which of the following is an example of a
project that could be observed in the short
run?
A) The construction of a new assembly line
to match an existing one.
B) The construction of a new assembly line
to take advantage of a new technology.
C) The moving of an established assembly
line to bring it geographically closer to a
market.
D) The sale of an existing assembly line on
the scrap market to finance part of a new
facility.
E) None of the above.
Answer: E

25. 13-The employment of which of the
following inputs might be adjusted in
the short run?
A) Physical capital.
B) Number of hours worked by labor.
C) Units of energy required per unit
output.
D) Units of material required per unit
output.
E) None of the above.
Answer: B

26. 14-The computer has helped workers
become more productive, this is an
example of which of the following:
A) technological change.
B) labor change.
C) smarter labor.
D) production function.
Answer: A

27. 15-The short run is a period of time so
short that:
A) output cannot be varied.
B) at least one input is fixed.
C) all inputs are fixed.
D) all inputs are variable.
E) none of the above.
Answer: B

28. 16-Consider an accounting firm which hires workers to
enter data into a computer program. Which of the
following would be considered a short run decision?
A) The firm would like to hire ten more workers for
a weekend shift.
B) The firm is considering an investment in
additional computers.
C) The firm would like to build its own facility.
D) The firm might purchase new computer software
that would require some new computer hardware as
well as extensive training for workers.
E) All of the above decisions could be made in the
short run.
Answer: A

29. 17-When new engineering knowledge
improves production techniques for
existing products:
A) Process innovation.
B) Product innovation.
C) Production improvement
D) Labor innovations.
E) none of the above.
Answer: A

30. 18-If new or improved products are
introduced to the marketplace:
A) Process innovation.
B) Product innovation.
C) Production improvement
D) Labor innovations.
E) none of the above.
Answer: B

31. 19-If technological change causes a shift
in the production function, it will cause:
A) changes in the maximum output
produced at all different combinations
of inputs.
B) a shift in factor prices.
C) a shift in producer's rent.
D) a shift in capacity utilization.
E) all of the above.
Answer: A

32. 20-If production displays diminishing
returns for all inputs, then:
A) it must also display constant
returns to scale.
B) it must also display increasing
returns to scale.
C) it must also display decreasing
returns to scale.
D) total product need never
decline.
E) any of the above might apply.
Answer: E

33. Analysis of Costs
COSTS/ SUPPLY
Chapter(4(
•OPPORTUNITY COST.
•The economist's definition of costs is
broader than the accountant's. Economic
cost includes not only the obvious out-of-
pocket purchases or monetary
transactions but also more subtle
opportunity costs,

34. •such as the return to labor supplied by the
owner of a firm. These opportunity costs are
tightly constrained by the bids and offers in
competitive markets, so price is close to
opportunity cost for marketed goods and
services.

35. •The most important application of
opportunity cost arises for nonmarket
goods - those like clean air or health or
recreation - whose services may be highly
valuable even though they are not bought
and sold in markets.

36. •Total cost (TC( can be broken down into
fixed cost (FC( and variable cost (VC(. Fixed
costs are unaffected by any production
decisions, while variable costs are incurred
on items like labor or materials which
increase as production levels rise..

39. Marginal cost (MC(
is the extra total cost resulting from 1 extra
unit of output. Average total cost (AC) is the
sum of ever-declining average fixed cost
(AFC) and average variable cost (AVC).
Short-run average cost is generally
represented by a U-shaped curve that is
always intersected at its minimum point by
the rising MC curve.

42. •TC = FC + VC
AC = TC/q
AC = AFC + AVC
•At the bottom of U-shaped AC, MC = AC =
minimum AC.
•Costs and productivity are like mirror
images. When the law of diminishing
returns holds, the marginal product falls
and the MC curve rises. When there is an
initial stage of increasing returns, MC
initially falls

46. •Competitive Supply
P = MC as maximum-profit condition
firm's ss supply curve and its MC curve
zero-profit condition, where
•P = MC = AC
•shutdown point, where
•P = MC = AVC
•summing individual ss curves to get
industry SS

48. •short-run and long-run equilibrium
long-run zero-profit condition
producer surplus + consumer surplus
= economic surplus
efficiency = maximizing economic surplus.

49. •GOOD LUCK