Production refers to the economic process of converting of inputs into outputs. Production uses resources to create a good or service which is suitable for exchange. In other words, production is the act of transforming the inputs into output is called the production process.
Production Function
According to Rojer Miller Production Function is a schedule or mathematical equation that gives a maximum quantity of output than can be produced from specified sets of inputs while techniques of production are given.. There are two production function approaches I.Classical Production Function ii.Neo-Classical Production Function
Whereas neoclassical production function is concerned with long run period, where all the factors of production are variable, for example if in any period the firm is a position to change its plant and units of labour. The neo-classical function can also be stated as: Q = (L, K) , Where Q = output, L = and In general form: Q=f (L, K, N, TECH), where N= natural resources and TECH = Technology K= capital
If marginal product (MP) increase such will demonstrate the situation of law of increasing returns Law of Constant Returns
If MP remains constant such depicts the law of constant returns Law of Decreasing Returns
If MP falls such situation means the law of decreasing returns. Total Product:
(TP=Q) i.e. if a firm produces 50 bicycles by employing 10 labour. Such will represent total product of the firm. Average Product (AP)
The addition to total output that results from a unit increase in the employment of labour. MP = Q / L = dQ/dL Now these concepts are helpful in understanding the concept of
L 1 2 3 4 5 6 7 8 9
Short Run
It is a period where a firm can change its variable factors like labour etc while it cannot change its fixed factors like capital etc. Moreover, in short run neither new firms can enter the industry nor the old firms can leave the industry.
Variable Cost
It is the cost, which directly varies earth the changes in the level of output. It arises because of variable inputs. If it is a firm produces nothing (has zero output), variable cost will be zero. It includes a. b. c. Cost of raw material Transport Sales commission d. e. f. Wages of labour Electricity, fuel and power charges. Depreciation
Behaviour and Relationship of Costs: Total Total Fixed Cost (TFC) II Total Variable Cost (TVC) III Total Cost (TC) IV AFC + AVC = ATC V VI VII MC VIII Average Cost Marginal Cost
Output Units
0 1 2 3 4 5 6 7
20 20 20 20 20 20 20 20
0 30 50 65 77 95 125 175
30 20 15 12 18 30 50
Diagram: Below
TC increases continuously at varying Rates. TC = TFC+ TVC AFC goes on decreasing continuously.TFC is a straight line parallel to X axis. It is not affected by the level of output. TVC curve begins from origin and rises steadily as TVC does not change at constant rate. Gradient of TVC is different at different levels of output and its graph is not a straight line. TC curve has the same starting point as TFC but, its shape is similar to TVC. The vertical distance between TC and TVC curves represents TFC. Thus at output level OQ, TVC is QH while TFC is HA. Note: in figure the general shape and inter relationship of AFC, AVC and AC is clear. From point A to M, AC curve is falling and MC is below AC. But after point M, AC starts rising and MC is above AC. AC and MC are equal at the point M where AC is minimum. AFC = TFC /Output Average Variable cost is calculated by the following formula AVC = TVC / Output ATC = TC/output
To describe the relationship between output and cost three measures are used. Total cost (TC), it is sum of fixed and variable cost at each level of output. Average Cost (AC), it is the per unit cost that is AC = TC /Output. Marginal Cost,( MC), it is the addition to total cost by producing an extra unit of output. MC = Change in TC/Change in Q = TC/Q The relation of these costs becomes clear, if we look at the table
Output (Q) 10 11 TC 100 122 AC 10 11 MC 22
Long-Run total costs (LTC) If we multiply the LAC by the units of the good produced we get LTC. LTC = LAC X Q
4 10 40 6.10
5 9
6 8.30
7 8 56
8 8.20 65.6
9 9 81
10 10
11 11.30
12 13 156 31.70
45 49.80 5 4.80
Curves: LTC and LMC and LAC As long-run consists of so many short-run periods, accordingly, LAC will come into being by joining different minimum short-run average costs (SACs). Long-run Average Cost Curve: It is a curve which shows minimum average costs of different levels of output in the long- run when the firm can change both the labour and capital.