Production Theory
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The document discusses key concepts in production theory and firm behavior, including: 1) It defines production as the creation of utility through combining the factors of land, labor, capital and entrepreneurship. 2) It introduces the production function which shows the maximum output possible from different combinations of inputs, given technology. 3) It explains the differences between total, average and marginal product, and how marginal product shows the change in output from an additional unit of input. 4) It then discusses the costs a firm faces, including total, average and marginal costs, and how profits are calculated as total revenue minus total costs.
![AC Cost per unit [ cost divided by unit ] AC = AFC + AVC e.g. AFC = TFC = 6000 = 60 Q 100 AVC = TVC = 8000 = 80 Q 100 AC = 60 + 80 = 140](https://image.slidesharecdn.com/production-theory-1223019792863919-8/85/Production-Theory-10-320.jpg)
Production Theory
- 2. Production Creation of U in a certain G or S as a result of which it commands P in the market
- 3. Production Function P.F is a schedule or mathematical equation that gives max quantity of output that can be produced from specified sets of input while techniques of production are given P = F (A, B, C, D)
- 4. Production Unit :- A unit where four factors of Production are combined to produce Goods or Services Firm :- An exact body that own or controls Production of 1 or more G & S Industry :- Group of Production units / Firms producing same product
- 5. Firm Product, Cost & Revenue Firm has to make 3 decisions:- (i) How much to P ? (ii) What will be total cost of Production ? (iii) How much revenue will be obtained ? Decisions carefully taken to obtain max profit PROFIT = TR - TC
- 6. Total Product (TP) :- Having employed certain no of L, what so ever is produced by firm Average Product (AP) :- Dividing TP by unit of L AP = TP L
- 7. Marginal Product (MP) Addition to total output that results by employment of additional L MP = Q = d Q L d L MP give slope of TP
- 8. Firm Cost TC AC MC
- 9. TC TFC => cost borne ever if firm isn’t operating TVC => bears regarding valuable factor of Production TC = TFC + TVC e.g. for 100 units TC = TFC + TVC = 6000 + 8000 = 14000
- 10. AC Cost per unit [ cost divided by unit ] AC = AFC + AVC e.g. AFC = TFC = 6000 = 60 Q 100 AVC = TVC = 8000 = 80 Q 100 AC = 60 + 80 = 140
- 11. MC Net change TC by having produced additional units of any G MC = d TC d Q e.g. Q TC 100 1200 101 1210 d TC = 10 = 10 d Q 1
- 12. Firm Revenue TR :- Obtained by combining sale of all units e.g. 100 units , 5 Rp each TR = 5 x 100 = 500
- 13. Firm Revenue AR :- Dividing TR by units of output sold TR = 500 = 5 Q 100
- 14. Firm Revenue MR :- Each addition made to TR by sale of extra unit Units 101, P = 5 Rp TR = 5 x 101 = 505