File Name: theory of production and cost microeconomics .zip
Production is a process of combining various material inputs and immaterial inputs plans, know-how in order to make something for consumption output.
Everything has a cost, and that is true for firms as well as consumers. When firms produce goods, they incur costs that vary depending on how much they are producing. In this lecture, we will analyze firms' cost functions.
Variable costs change according to the quantity of goods produced; fixed costs are independent of the quantity of goods being produced. In economics, the total cost TC is the total economic cost of production. It consists of variable costs and fixed costs. Total cost is the total opportunity cost of each factor of production as part of its fixed or variable costs.
Costs of production relate to the different expenses that a firm faces in producing a good or service. These are costs that do not vary with output. However many goods are produced, fixed costs will remain constant. These are costs that do vary with output. As output increases, there will be more variable costs. For example, as you produce more cars, you will have to pay for more raw materials, such as metal, tyres and plastic. Some costs may exhibit both fixed and variable factors.
For example, a firm may continue to employ workers, even during a slump in production. But, as output increases, they may take on more workers or pay overtime. In the short run, a firm will have fixed capital it takes time to increase the size of factories. In the short run, the firm can vary the quantity of labour. However, in the short term, a firm is likely to experience diminishing marginal returns. This means as firms employ more workers, there will come a point where extra workers have a declining marginal product.
In the long run, a firm can vary all factors of production , such as capital and labour. Therefore, the firm will not face diminishing returns. However, as the amount of capital can vary, the firm may experience economies or diseconomies of scale. Increase in electricity cost not mentioned. China burns coal. We do not. Marginal Cost : This is the cost of producing an extra unit. Short-run costs subject to diminishing returns Long-run costs potential economies and diseconomies of scale.
Fixed Costs FC These are costs that do not vary with output. As more goods are produced, the average costs will fall. Variable Costs These are costs that do vary with output. Short Run Costs In the short run, a firm will have fixed capital it takes time to increase the size of factories.
Diminishing Returns in the short run As productivity and marginal product falls, the marginal cost of production will increase. See: Diminishing returns to scale Long Run Costs In the long run, a firm can vary all factors of production , such as capital and labour.
Economies of scale occur when increased output, leads to lower long-run average costs Diseconomies of scale occur when increased output leads to higher long-run average costs. Factors affecting costs of production Wage costs. Labour productivity. New technology which improves output per worker enables the firm to cut back on employing workers, leading to lower costs. Exchange rate. A rise in the exchange rate makes imports cheaper. If the firm needs to import raw materials, an appreciation can reduce the cost of production though exports will be less competitive Raw materials.
A rise in the cost of raw materials, e. Nearly all firms will be affected by higher oil prices — which increase the cost of transport. Higher national insurance tax on workers raises costs. Bureaucracy and administration. Firms which have to fill in paperwork and complicated tax returns will have higher costs.
This could be significant for firms who export but have to pass through administrative hurdles non-tariff barriers Transport costs Interest rates. FIrms who borrowed to invest will be affected by an increase in interest rates — which raises the cost of loan repayments. Related Factors that affect profitability of firms Diagram of cost curves.
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In economics the long run is a theoretical concept in which all markets are in equilibrium , and all prices and quantities have fully adjusted and are in equilibrium. The long run contrasts with the short run , in which there are some constraints and markets are not fully in equilibrium. More specifically, in microeconomics there are no fixed factors of production in the long run, and there is enough time for adjustment so that there are no constraints preventing changing the output level by changing the capital stock or by entering or leaving an industry. This contrasts with the short run, where some factors are variable dependent on the quantity produced and others are fixed paid once , constraining entry or exit from an industry. In macroeconomics , the long run is the period when the general price level , contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run when these variables may not fully adjust.
In economics, production theory explains the principles in which the business has to take decisions on how much of each commodity it sells and how much it produces and also how much of raw material ie. It defines the relationships between the prices of the commodities and productive factors on one hand and the quantities of these commodities and productive factors that are produced on the other hand. Production is a process of combining various inputs to produce an output for consumption. It is the act of creating output in the form of a commodity or a service which contributes to the utility of individuals.
Production can be defined as the transformation of resources into commodities. The production function is the relationship between the output and the factors of production. Students can refer to the Class 12 Economics Chapter 3 Notes to revise the formula that defines the production function.
These solutions for Production And Costs are extremely popular among Class 11 Commerce students for Economics Production And Costs Solutions come handy for quickly completing your homework and preparing for exams. The production function of a firm depicts the relationship between the inputs used in the production process and the final output.
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View Notes - Lecture 5 & 6 Theory of production and icel3.org from ECONOMICS BA at Addis Ababa University. LECTURE 5. THEORY OF THE FIRM.