MANAGERIAL ECONOMICS: Long-run- is a period of time long enough that

all factors of production can be adjusted.

What is Production?
Production Function:
Production system is consist of Demand
Information, Products, Raw Materials and Parts The establish physical relationship
and Resources. among inputs, process, and outputs in a
production situation and can be expressed in
Production (Flow):
mathematical form:
Input: Materials, components, labour, research
Q = f(x)
and development
Q = Output
Processing: Product lines, assembly lines,
management and skills f = is a function

Output: End product, customer satisfaction and X = Inputs

employee satisfaction
MP = Marginal Product
Feedback: information, new ideas, expertise
𝚫𝑻𝑷
and customer feedback MP =
𝚫𝑿
Factors of Production: AP = Average Product
 Land 𝚫𝑻𝑷
 Labour AP =
𝑿
 Capital
Inputs TP MP AP
 Entrepreneur
0 0 ***** *****
Production is a co-operative process and 1 5 5 5
not a job of any single factor. 2 12 7 6
3 20 8 6.7
Fixed and Variable Inputs 4 27 7 6.8
5 33 6 6.6
Fixed Resource- is an output for the production
6 38 5 6.3
of goods and services that does not change in
7 42 4 7
the short run like factory, building, equipment,
8 45 3 5.7
etc.
9 42 -3 4.8
Variable Resource- an input whose quantity can 10 38 -4 3.8
be changes in the time period under
consideration like labor and raw materials. Production Isoquant
Short Run and Long Run in Production
 Isoquant is also called as equal product
Short- run- is a period of time during which at curve or production indifference curve
least one input is fixed while the others are or constant product curve
variable. It is short enough that not all factors of  Isoquant indicates various
production can be adjusted. combinations of two factors of
production which give the same level of
output per unit of time
 Isocost Variable Cost (VC) - expense that varies with
production output. They rise as production
Isocost curve/line is the locus traced out by
increases and fall as production decreases
various combinations, each of which cost the
producer the same amount of money. Total Cost (TC) - the market value of all the
inputs used by the firm in production (FC + VC)
 An isocost line is also called outlay line
or price line or factor cost line Opportunity Cost- the cost of an alternative
 An isocost line shows all the that must be forgone in order to pursue a
combinations of labour and capital that certain action
are available for a given total cost to
 Average Cost (AC)- also called the unit
the producer
cost
 The greater the total cost, the further
𝑻𝑪
from origin is the isocost line AC =
𝑸
Optimal Combination of Inputs  Marginal Cost (MC)- extra cost for
producing one additional unit of output
The point of tangency between any
𝚫𝑻𝑪
isoquant and an isocost line gives the lowest- MC =
cost combination of inputs that can produce the 𝚫𝑸
level of output associated with that isoquant. TOTAL COST DATA
This analysis is based on the following
OUTPUT TFC TVC TC MC
assumptions:
0 40 0 40 --------
1. There are two factors. Labor and capital 2 40 70 110 35
2. The prices of units of labor (L) and that 3 40 130 170 60
of capital (K) are given and constant 4 40 180 220 50
3. The cost outlay is given 5 40 240 280 60
4. The firm produces a single product
6 40 310 350 60
5. The price of the product is given and
7 40 380 420 70
constant
6. The firm aims at profit maximization 8 40 460 500 80
7. There is perfect competition in the 9 40 550 590 90
factor market 10 40 650 690 100

Types of Economic Cost

Total Revenue and Marginal Revenue
Explicit Cost- also called the expenditure cost.
Payments to the owners of the factors of  Total Revenue (TR) – income received
production like wage, interests, raw materials from the sale of goods and services

Implicit Cost- a firm’s opportunity cost of using TR = Price x Output

its own factors of production without
corresponding cash payment like rent for land

Fixed Cost (FC)- does not change with an

increase or decrease in the amount of goods or
services produced
  Marginal Revenue (MR)- the change in Break-even price:
the total revenue resulting from the 𝑇𝐹𝐶+𝑇𝑉𝐶
sale of one unit of output Q be =
𝑄
𝚫𝑻𝑹
MR =
𝚫𝑸
Profit and Loss Data
OUTPUT TC MC TR MR Profit/
(Loss)
1 40 60 60 20
2 110 70 120 60 10
3 170 60 180 60 10
4 220 50 240 60 20
5 280 60 300 60 20
6 340 60 360 60 20
7 410 70 420 60 10
8 490 80 480 60 -10
9 580 90 540 60 -40
10 680 100 600 60 80

Break-even Point

The level of output at which total revenue

equals total cost and can be determined using 3
approaches:

1. Based on the total cost and total

revenue schedule. Analyze the entries.
The break-even point is when:
Total revenue = Total cost
2. Graphing- the point of intersection
between the total cost and total
revenue curves
3. Mathematical computation using the
following basic equation:
TR = TC
P x Q = TFC + TVC

Break-even volume:
𝑇𝐹𝐶+𝑇𝑉𝐶
Q be =
𝑃