Scribd Logo
Upload

Welcome to Scribd!

  • 51 views

    Economics Notes Unit 4

    Uploaded by

    karankumar67656
    1. Firms exist primarily to manage the process of production as specialized organizations. Production is organized in firms because large-scale production requires economies of specialization, raising significant financial resources, and careful management and coordination. 2. A firm's production function shows the maximum output that can be produced from various quantities of inputs like capital and labor. Isoquants graphically represent the production function, showing different input combinations that produce the same output level. 3. In the short run, one input is fixed while the other can vary. In the long run, all inputs can vary. Total, average, and marginal product curves show output from changing the variable input while holding others fixed. Marginal product initially

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Economics Notes Unit 4

    Uploaded by

    karankumar67656
    51 views8 pages
    1. Firms exist primarily to manage the process of production as specialized organizations. Production is organized in firms because large-scale production requires economies of specialization, raising significant financial resources, and careful management and coordination. 2. A firm's production function shows the maximum output that can be produced from various quantities of inputs like capital and labor. Isoquants graphically represent the production function, showing different input combinations that produce the same output level. 3. In the short run, one input is fixed while the other can vary. In the long run, all inputs can vary. Total, average, and marginal product curves show output from changing the variable input while holding others fixed. Marginal product initially

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    1. Firms exist primarily to manage the process of production as specialized organizations. Production is organized in firms because large-scale production requires economies of specialization, raising significant financial resources, and careful management and coordination. 2. A firm's production function shows the maximum output that can be produced from various quantities of inputs like capital and labor. Isoquants graphically represent the production function, showing different input combinations that produce the same output level. 3. In the short run, one input is fixed while the other can vary. In the long run, all inputs can vary. Total, average, and marginal product curves show output from changing the variable input while holding others fixed. Marginal product initially

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    51 views8 pages

    Economics Notes Unit 4

    Uploaded by

    karankumar67656
    1. Firms exist primarily to manage the process of production as specialized organizations. Production is organized in firms because large-scale production requires economies of specialization, raising significant financial resources, and careful management and coordination. 2. A firm's production function shows the maximum output that can be produced from various quantities of inputs like capital and labor. Isoquants graphically represent the production function, showing different input combinations that produce the same output level. 3. In the short run, one input is fixed while the other can vary. In the long run, all inputs can vary. Total, average, and marginal product curves show output from changing the variable input while holding others fixed. Marginal product initially

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 8

    ECONOMICS NOTES

    $$ UNIT 4: Production and Cost

     Nature of Firm
     Firms or business enterprises exist for many reasons, but the most
    important is that business firms are specialized organisations
    devoted to managing the process of production.
     In the first place, production is organized in firms because of
    economies of specialization. Efficient production requires specialized
    labour and machinery, coordinated production, and the division of
    production into many small operations.
     A second function of firms is raising resources for large-scale
    production.
     A third reason for the existence of firms is to manage and coordinate
    the production process. Once all the factors of production are
    engaged, someone has to monitor their daily activities to ensure that
    the job is being done effectively and honestly.
    i.e. “Business firms are specialized organizations devoted to
    managing the process of production. Production is organized in firms
    because efficiency generally requires large-scale production, the raising
    of significant financial resources, and careful management and
    coordination of ongoing activities.”

     Production Function
    q = f(K,L)
    Capital Labour
     The production function of a firm is a relationship between inputs used
    and output produced by the firm.
     For various quantities of inputs used, it gives the maximum quantity
    of output that can be produced. The inputs that a firm uses in the
    production function process are called Factors of Production.
    Production Function, q = f(K,L)

    Isoquant
     Isoquants are a geometric representation of the production function.
    The same level of output can be produced by various combinations of
    factors in goods.
     We can draw a curve by plotting all possible combinations of labour
    and capital for given level of output. Any quantity of a good can be
    produced by using many different combinations of labour and capital
    (assuming both can be substituted for each other).

     An isoquant or an iso-product curve is the line which joins together


    different combinations of the factors of production (L,K) that are
    physically able to produce a given amount of output.
     Suppose isoquant refers 100 kg of output. This output can be produced
    by a large number of different combinations of labour and capital.
    Eg:- As in the given figure above 10 units of capital and 5 units of
    labour at point A provide the same level of output as 3 units of capital
    and 20 units of labour input at point B.
    The firm can choose any of these
    combinations A or B or any other combination which lies on the same
    isoquant to get 100 kg of output.

     Point A requires more capital but less labour, represents capital


    intensive methods of production. Point B requires less capital and
    more labour, represents labour intensive methods of production.
     For movement along an isoquant, the level of output remains constant
    and the ratio of capital to labour changes continuously. However, a
    movement from the isoquant to another means that the level of output
    changes.
     Short Run and Long Run
    1. Short Run:- In the short run, a firm cannot very all the inputs. One of
    the factors i.e. K or L can be varying and therefore one factor that
    remains fixed is called fixed input, whereas the other factor that is
    varying is called the variable input.
    2. Long Run:- In the long run, all factors of production can be varied. A
    firm in order to produce different levels of output in the long run may
    vary both the input simultaneously. So, in the long run there is no fixed
    input.
    Note: It is not advisable to define short run or long run in terms of days,
    months or years.
    We define periods as long run and short run simply by
    looking at weather all the inputs can vary or fixed.
    Total Product, Average Product & Marginal Product
    Inputs- (i) Fixed Inputs
    (ii) Variable Inputs
    q = f(K, L, N, L, T)
    Variable Input
    x1= variable x1= Fixed Input Total Product Average Product Marginal Product
    input Output (T.P) (A.P) (M.P)
    0 0 0 ___ ___
    1 10 10 10/1= 10 10-0/1-0= 10
    2 24 24 24/2=12 24-10/2-1= 14
    3 40 40 40/3=13.33 40-24/3-2= 16
    4 50 50 50/4= 12.5 50-40/4-3= 10

     Total Product (T.P)


     Suppose we vary a single input and keep all other inputs constant,
    then for different levels of employment of that input, we get different
    levels of output from the production function.
    q = f(K, L, N, L, T) where, L is a variable input and rest are constant.
    Cost Technology
    Labour Land
    Natural Resources
     This relationship between the variable input and output, keeping all
    other inputs constant is often referred to as total product (T.P.) of the
    varible input. This is also called as total return too or total physical
    product of the variable input.
    Eg:- Fom the above table x1= 2; x2= 4 and Output (Total Product)= 24
     Average Product (A.P)
     Average product is defined as the output per unit of variable input.
    Eg:- x1= 2; x2= 4, then A.P.= 24 = 12
    2
     Marginal Product (M.P)
     Marginal product is defined as the change in output per unit of change
    in the input when all other inputs are held constant.
    M.P = Change in Output = ∆ q where ∆ represents
    Change in Input = ∆ x1 change of the variable

    Eg:- If, x1= 1; x2= 4; then, M.P = 24-10 = 14 = 14


    x1= 2; x2= 4 2-1 1
    Note: Total Product () is sum of marginal product.
    50 = 10+14+16+10
    50 = 50
    i.e. M.P= 50
    The law of diminishing marginal product and the law of
    variable proportion
     The law of diminishing marginal product says that if we keep
    increasing the employment of an input with other inputs fixed,
    eventually a point will be reachable after which the resulting addition
    to output will start falling.
    A somewhat related concept which the law of
    diminishing marginal product (M.P.) is the law of variable proportions.
    It says that the marginal product of the factor input initially rises with
    its employment level, but after reaching a certain level of employment,
    it starts falling.
     Seeing above example with x2= 4, x1 was increasing from 1 to 4 etc.
    Total output was first increasing, 0,10,24,40,50,56 then decreasing
    with addition input.

     Shapes of T.P, A.P and M.P

     T.P is a positively sloped curve.


     According to law of variable proportion, M.P initially rises and then
    after a certain level of employment, it starts falling.
     The M.P curve therefore looks like an inverse U-shaped curve.
     A.P rises less than M.P, then after a point M.P starts falling.
     However, as long as the value of M.P remains higher than the value of
    prevailing A.P, the latter continues to rise.
     Once M.P Has Fallen sufficiently, its value becomes less than
    prevailing A.P and the latter also starts falling.
    Theory of Costs
    q Fixed Cost Variable Cost Total Cost= F.C + V.C Average Cost Marginal Cost
    (F.C) (V.C) (T.C) (A.C) (M.C)
    0 55 0 55 ___ ___
    1 55 30 85 85/1= 85 55-85/0-1= 30
    2 55 55 110 110/2=55 110-85/2-1= 25
    3 55 75 130 130/3=43.33 130-110/3-2= 20
    4 55 105 160 160/4= 40 160-130/4-3= 30
    5 55 155 210 210/5= 42 210-160/5-4= 50
     Average Cost (A.C)= Total Cost (T.C)/q
     Marginal Cost (M.C)= ∆Total Cost (T.C)/ ∆q (change in output)
     Total Cost= Fixed Cost (F.C) + Variable Cost (V.C)

    Cost Derived Functions


     Cost functions are derived functions. They are derived from the
    production function. Short run costs are the cost over a period during
    which some factors of productions are fixed.
    q = f(K, L, N, L, T)

     The cost that are formed incurs to employ these fixed inputs is called
    the total fixed cost. To produce any required level of output, the firm
    in the short run can adjust only variable inputs.
     The cost that are formed incurs to employ these variable inputs is the
    total variable cost. Adding the fixed and the variable cost is the total
    cost affirm.
    T.C= Total Fixed Cost (TFC) + Total Variable Cost (TVC)
     The short run average cost (SAC) incurred by firm is defined as total
    cost per unit of output.
    A.C= TC/q(output)
     Similarly, Average variable cost is the total variable cost per unit of
    output.
    AFC= TFC/q(output)

    AVC= TVC/q(output)

    Hence, SAC= AFC+AVC


     Short Run Marginal Cost (SMC) is defined as the change in total cost
    per unit of change in output.
    SMC = Change in total cost = ∆TC
    Change in output ∆q
     Shapes of Short Run Cost Curve

     Returns to Scale (Economics to scale/ Specialization)

    o Constant Return to Scale


     Production function that holds when a proportional increase in all
    inputs results in an increase in output by the same proportion. So, it
    is constant return to scale.

    o Increasing Return to Scale


     When a proportional increase in all the input results in an increase in
    output by more than the proportion.

    o Decreasing Return to Scale


     When a proportional increase in all inputs results in an increase in
    output by less than the proportion.
    Role of Technology (Technological progress and production function)

     New inventions may result in the increase of efficiency of all methods


    of production. At the same time, some techniques may become
    insufficient and drop out from the production function.
     Practically, the effect of innovation in processes is shown with an
    upward shift of production function, (Fig. 1) and downward movement
    of the production isoquant, (Fig. 2).
     In Fig. 2, this shift shows that same output may be produced by less
    factor inputs or more output may be obtained with the same level of
    input.

     Opportunity Cost
     Opportunity cost is a concept in economics that is defined as those
    values or benefits that are lost by a business or organisations when
    the choose one option or an alternative option over another option in
    the course of making business decisions.
    Opportunity cost can be viewed as a
    trade off. Trade off happens in decision making when one option is
    chosen over another option. Opportunity cost sums up the total cost
    for that trade off.
    Eg:- Assume that a business has available funds and must choose
    between investing the money in securities, with a return rate of 10% a
    year of loosing it to purchase new machinery. No matter which option the
    business chooses, the potential profits that it gives up by not investing in
    the other option is the opportunity cost.

    You might also like