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Concept of Production

1.     Total product (TP) total physical product

It is overall Production of all the factors of production. It is sun of marginal product

TP / TPP    =    ∑MP  or ∑MPP

      

                Or

 

TP/TPP    =   AP * 1

2.     Marginal product /[M.P]/Marginal Physical Product [MPP]

It is additional production from use of additional units of variable factors. Means it is net change in TP. Due to use of one more additional unit of variable factor.

 

         MP                =              TPn       - TPn-1

 

                                    OR

           MP                =            ∆TP/L

 

3.     Average Product / Average Physical Product (APP)

It is per unit product of variable factor.   

                                                   

                                                AP            =        TP/L

 

F.F.	V.F. (L)	MP		TP	AP
1	1	2		2	2
1	2	4		6	3
1	2	4		6	3
1	3	6		12	4
1	4	8		20	5
1	5	6		26	5.2
1	6	4		30	5
1	7		2	32		4.5

 

 

 

 

 

 

Shape Of TP , MP & A.P.

 

·       Law of variable proportion / Return’s to a factor

This Law is applicable in short term, in short term when we combined variable factor with fixed factors then initially marginal product increased up to a point after that it decreases and finally it become negative.

1.     Increasing return to a  factor

                         OR

Increasing law of variable proportion

 

à (1) In this stage MP increases

(2) In this stage T.P. increases with increasing rate

(3) In this stage, AP increases

 

2.     Diminishing returns to a factor

                          OR

         Diminishing Law of V.P.

à (1) In this stage MP decreases & reaches to zero

(2) In this stage, AP initially increases, reaches to maximum then decreases.

(3) In this stage, TP increases with decreases rate.

Assumption to the law of variable Proportion

·        Only physical input & physical output is to be considered.

·        Quality or skill of variable factor should remain constant.

·        Technology must be constant.

·        Variable factors are complementary to fixed factor note substitute.

·        Change in factor proportion is possible

·        Only one factor is variable other must be constant.

Why law of variable proportion operate

Stage 1 :- Increasing law of variable proportion occurs due to :-

1.     Better Coordination b/w fixed factors & variable factors

2.     Specialization of work because more labors are available.

3.     Division of work will leads to better management.

4.     Fuller utilization of fixed factor increase production.

Stage 2 :- Diminishing law of variable proportion occurs due to :-

1.     Fixed factors cannot be substituted by use of more variable factors.

2.     Lack of coordination b/w factors.

3.     Use of more than required no. of labor leads to mismanagement.

Note :- A rational producer will continue to product even after I stage as TP is increasing & will not enter in 3 stage because TP is decreases so a rational producer always producer in stage 2.

 

Relationship  AP & MP

·        When AP increases, MP remains above AP.

·        When AP is maximum, MP intersect AP.

·        When AP decreases, MP remains below AP.

Relationship  b/w MP & TP

·        When MP increases TP increases with increasing rate.

·        When MP is maximum, there is a P.D.I at T.P.

·        When MP decreases then TP increases with decreasing rate.

·        When MP is O, TP is maximum

·        When MP become negative then TP decrease

 

Cost

Cost is expenditure incurred on production of commodities. It is a payment which made to factor inputs & non-factors input. It includes explicit & impact it cost.

Accounting Cost / Out of pocket

1.     Explict cost :   Those cost which are paid to outsides for their services like ways to worker rent to building etc.

2.     Implict cost :
Those cost which are inputted on self-supplied resources like rent of own building, own salary, I.O.C.

Cost According To Time Period

1.     Short Run Cost : In Short run there are two types of factors of production, fixed factors & variable factors cost which incurred on fixed factors & variable factors in short run is called short run cost.

2.     Long Run Cost : In long run, there are no fixed factors only variable factors exist so in long run cost paid to this factors is called long run cost.

 

 

Types Of Sort Run Cost

1.     Total Fixed Cost (TFC) : It is a cost which incurred on fixed factors in short run it is independent from size of production it remains constant.

TFC – AFCXQ

Output	TFC
0	10
1	10
2	10
3	10
4	10
5	10
6	10
7	10
8	10

 

2.  Total Variable Cost (TVC)

This are cost incurred on variable factor in short run, this are change according to production. Mean if production is term this cost also zero & this increases in with increase in production.

 

Output	TVC
0	0
1	10
2	15
3	19
4	22
5	25
6	29
7	34
8	40

                                 

 

 

3.   Total Cost (TC)

It is sum of total fixed cost & total variable cost means it is overall payment made to fixed factors and variable factor.

TC =  TFC + TVC                        AC * Q

Output	TFC	TVC	TC
0	10	0	10
1	10	10	20
2	10	15	25
3	10	19	29
4	10	22	32
5	10	25	35
6	10	29	39
7	10	34	44
8	10	34	44
8	10	40	50

         

 

 

 

4.   Average Fixed Cost (AFC)

It is per unit total fixed cost of an output.

AFC  = TFC/Q   or   AC-AVC

Output	TFC	AFC
0	10	-
1	10	10
2	10	5
3	10	33
4	10	25
5	10	2
6	10	1.6
7	10	1.4
8	10	1.6

 

 

 

 

 

 

5.   Average Variable cost (AVC)

It is per unit total variable cost of an

Output

                      AVC =   TVC/Q   or    AC – AFC

OUTPUT	TVC	AVC
0	0	0
1	10	10
2	15	7.5
3	14	6.3
4	22	5.5
5	25	5
6	29	4.8
7	34	4.8
8	40	5

 

 

 

 

6.    Average Cost (AC)

It is per unit total cost of an ouput

AC = TC/Q                           AC =AVC + AFC

Output	TC	AC
0	10	0
1	20	20
2	25	12.5
3	29	9.6
4	32	8
5	35	7
6	39	6.5
7	44	6.2
8	50	6.2

7.   Marginal Cost

Additional cost due to production of one more additional unit. It is net change in total cost due to production of one additional unit.

MC    = TCn   -  TCn -1

                 OR

MC    =   ∆TC/∆Q

Output	TC	MC
0	10	0
1	20	10
2	25	5
3	29	4
4	32	3
5	35	3
6	39	4
7	44	5
8	50	6

 

 

 

 

 

Relationship between AC & MC

·        When AC decreases MC below AC

·        When AC is minimum then MC intersect to Ac

·        When AC increases then MC is more than AC.

 

Relationship between AVC & MC           

·        When AVC decreases then MC is below AVC

·        When AVC is minimum then MC intersect to AVC

·        When AVC increases then MC is more than AVC.

 

Why AC, A/C & MC are V-shaped?

In short run law of variable proportion is applicable hence in short run who we combined variable factors with fixed factors then initially marginal product increases reaches to maximum and finally decreases there is inverse relation between production & cost that’s why marginal cost curve is V-shaped.

 

Important

1.     Meaning of explicit & implicit cost

2.     Explain shortrun cost

3.     Meaning of production function

4.     Differentiate short run production & long run production

5.     Explain law of variable proprortion return to part

6.     Explain law of demand.

7.     Explain the exception to the law of demand

8.     Factro affects demand / determinats

9.     Why dimand curve slope downward?

10.Degrees of elasticity of demand.

11.Factors affecting elasticity of demand.

12.Difference b/w change in demand changein quantity.

Chapter 1

     13.Central Problems

13.PPC (Production Possibility Curve) Micro  Macro difference.