Production Funtion downward.

 a statement of technological relation between input Isoquant

and ouput.  Greek word Iso which means equal
 The functional relationship between in and outputs.  A contour line drawn through the set of points which
 Shows the maximum output obtained for given consist of different combinations of Labor(L) and
combination of inputs. Capital(K) at which the same quantity of output is
 Q = f(x1,x2…xn). Q is the maximum quantity of output, produced by changing the quantities of one or more
x is the input. inputs.
 Higher isoquant = greater quantity
Technical Efficiency
 Lower isoquant = smaller quantity of output
 When it obtains maximum level of output from any
 Also known as Production Indifference Curve, Equal
given combinations of inputs
product curve or Isoproduct Curve.
 Used only when input combinations are given
 How to produce maximum output
Y-Isoquant
 The set of all pairs of inputs that yield the output.
Economic Efficiency
 Produces output at the lowest possible cost for a
Isocost Line
combination of inputs
 Shows all combinations of inputs which the cost the
 Used when input prices and combinations of inputs are
same total amount
given.
 Pertains cost-minimization.
Fixed Inputs
Extension Path
 Quantity cannot be varied
 The line joining tangency points od isoquants and
isocosts
Variable Inputs
 Amount cannot be changed during the relevant period.
Ridge Lines
 Lines OA and OB
Law of variable proportions
 States that as the quantity of one factor is increased,
Economic region of production
the marginal product of that factor will decrease.
 The region bounded by ridge lines
 The region of production beyond the ridge lines is
Constant state of technology
economically inefficient.
 State of technology is assumed to be given and
unchanged.
Cost
 Improvement in technology, marginal product will rise.\
 Reflects a monetary measure of the resources sacrificed
or forgone to achieve a specific objective
Fixed amount of other factors
 Some outputs whose quantity is kept fixed.
Cost object
 does not apply if all factors are proportionally varied.
 Is any activity for which a separate measurement of
costs is desired.
Possibility of Varying the Factor proportion
 Based upon the possibility of varying the proportions in
Direct Cost
which various factors can be combined to produce a
 Costs that can be specifically and exclusively identified
product.
with a particular cost object.
 Does not apply if the factors must be used in fixed
proportions to yield a product.
Indirect Cost
 The cost that cannot be identified specifically and
Illustration of the law
exclusively with a given cost object.
 Variable proportions are illustrated.
 It is considerable that sometimes direct costs are
Stage of Increasing returns
treated as indirect because tracing costs directly to the cost
 total product increases at an increasing rate up to a
object is not cost effective.
point.
 Cost can be treated as direct for one cost object but not
indirect in respect of another
Stage of Diminishing Returns
 Total product continues to increase but at a diminishing
rate until it reaches its maximum point.
Historical Cost
Stage of Negative Returns
 Cost of an asset refers to the actual cost incurred at the
 Product declines and therefore, TP curve slopes
 time it was acquired.
Variable Cost
Replacement Cost  Are those which do vary as a total cost to the
 Cost which must be incurred if the asset is to be organization when output varies.
purchased today.  A true variable cost will vary in exactly the same
proportion as the output

 Historical cost is used in balance sheet and Average Cost

calculating costs for use in completing firm’s
income tax returns. It is known as it is actually
incurred.
 Replacement costs are used in managerial
decisions. It may not be known unless proper
enquire are made in the market.
Incremental Cost
 Are the cost that vary with the decision.
 The total cost per unit of output
 Sum total of average variable and average fixed cost.
Marginal Cost
 Is the addition to the total cost by producing one more
units of outputs.
 The difference between the previous total cost and the
present total cost
 Changes due to the change in variable cost.

Sunk Cost Costs in the short run

 Costs which are invariance with the decision  Fixed and variable cost

 The cost relevant in decision making are Costs in the long run
incremental cost only. Sunk cost does not depend  Marginal and average cost
on the decision, they are irrelevant for decision
making. Total Revenue
 The total value of the output produced
Explicit Cost
 The business expense accounted cost that can be easily Marginal Revenue
identified such as wage, rent and materials.  Is the revenue received from selling one more units of
 Gives clear and evident cash flows output
 Directly affects the revenue
 Intangible assets are not explicit cost Optimum inventory level
 Is the level of stocks in the pipe line: goods which have
Implicit Cost been produced but have not yet reached the final
 Results if the person who at first foregoes the customers which can be held at minimum cost.
satisfaction in the search of an activity and is not
rewarded by money or another form of payment.
 Example is goodwill

Real Cost
 Straightforward
 Doing the work by myself

Opportunity Cost
 Calling a professional to do the work

Private Cost
 Cost that has to be paid by an individual who is directly
involved in the production of consumption of a
particular good

Social Cost
 Or external cost is the cost burden carried by individuals
who are not directly involved in the production

Fixed Cost Enumeration

 Does not vary in total when the level of output by the
business does vary. Various forms of market
  Monopoly  profit
 Monopolistic competition
 Oligopoly Short-run analysis of a perfectly competitive firm
1. Determining output
Characteristics of Market Structure 2. Total curves
 Effect on buyer 3. Production alternatives
 Production characteristics 4. Short run supply curve
 Product characteristics 5. Efficiency
 Conflict between physical characteristics and
minimum economic size Long run adjustment
 Firm adjustment
Determination of Market Price  Industry adjustment
 Demand
 Competition Models of Duopoly
 Costs  Cournot Model
 Costs plus  Bertrand’s Duopoly Model
 Markup  Edgeworth’s Model of Duopoly
 Target Return Method  Stackelberg’s Doupoly Model
 Profit Maximizing
 Breakeven analysis Kinked Demand Curve Model of Oligopoly
 Life Cycle  Sweezy’s Model of Kinked Demand Curve
 Sales Channel  Hall and Hitch Version of Kinked Demand Curve
 Government
Collusive Oligopoly Models
Features of Monopoly  Cartel
 One seller and large number of buyers  Price Leadership
 No close substitute
 Strong barriers to the entry into the industry exist
 Nature of demand curve

Features of Monopolistic Competition

 Large number of sellers
 Product differentiation
 Large number of buyers
 Freedom of entry and exit
 Absence of interdependence of firms
 Selling Cost
 Competition among sellers
 Price competition
 Non- price competition

Features of Perfect Competition

 Large number of buyers and sellers
 Homogeneous products
 Free entry and exit
 Perfect knowledge
 Perfect mobility of factors of production
 Absence of transport cost
 No attachment

Determining Output
 Profit
 Total revenue and cost
 Marginal revenue and cost

Total Curves
 Total revenue
 Total cost