Production and Cost

GROUP 4

Production Function
0 The production function of a firm is a relationship between input used and output produced by a firm. 0 The technological knowledge can also determine the max level of output. 0 Production function is written as

Q = f(X1,X2)

Total product
0 It is the total quantity of output of a commodity

produce by a firm using fixed and variable factors at a time.

Average product
0 Average product is defined as the output per unit of

variable input.

APx= TP QX

Marginal product
0 Marginal product is define as the change in output per

unit of change in the input. MP= Change in output Change in input

Law of diminishing marginal returns

0 The law of diminishing marginal utility states that,

as a consumer consumes more and more units of a specific commodity, utility from the successive units goes on diminishing.

The production function with two variable inputs

0 The long run is the lengthy period of time during with

all inputs can be varied. There are no fixed outputs in the long run. All factors of production are variable inputs.

Isoquants
0 An isoquant is the set of all possible combination of the 2

inputs that yield the same maximum possible level of output.

20 0 100

Marginal rate of technical substitution

0 The rate at which 1 input is substituted for another

the rate at which one input may be substituted for another, while maintaining the same level of output.

Optimal combination of inputs

0 Optimal combination of inputs for a given level of

output.

0 PLL+PKK=M 0

Returns to scale
0 The laws of returns to scale explain the behavior of

output in response to a proportional and simultaneous change in inputs. 0 there are three kinds of return to scale: Increasing returns to scale Constant returns To Scale Decreasing returns to scale

Constant

Output elasticity
0 The % change in output resulting from a one % inc in

all inputs.

Opportunity cost
0 Opportunity cost of producing a certain commodity is

the value of the other commodity that the resources used in its production could have produced instead.

Short Run Cost Function

0 Cost function show relationship bet input costs and

output cost. TC=TVC+TFC

0 Total fixed cost- those cost which do not vary with

output.
0 Total variable cost- the cost that vary with output.

Relationship between TC, TFC and TVC

Average cost
AC=AFC+AVC Average Total cost= TC output Average Fixed cost= TFC output Average Variable cost= TVC output

Marginal cost
0 It is the change in the total cost that arises when the

quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good.

Long Run Cost Function

Long run average cost= TC Output Long run marginal cost= change in cost per unit change in output

Managerial use of scale economies

0 Scale of economies refers to a situation where the

cost of producing one unit of a good or service decreases as the volume of production increases.
0 It show whether an to what extend larger plants have

cost advantages over smaller ones.

Scope of economies
0 When the cost of jointly producing two or more

products is less than the cost of producing each one alone. 0 It is implacable to multiproduct firm.

Break even analysis

0 Break even point is a point where the firm does not

earn profit nor loss. 0 Break-even analysis is a technique widely used by production management and management accountants.

Use of Break even analysis

0 It helps in determining the optimum level of output

below which it would not be profitable for a firm to produce. 0 It helps in determining the target capacity for a firm to get the benefit of minimum unit cost of production.

Profit contribution analysis

0 analysis help to understand the relationship between

price and profit which is also known as break even analysis.