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Production and Cost Analysis
Production and Cost Analysis
Meaning
In economics production refers to all such activities which create any of the following utilities
Form Utility Place Utility Time Utility
Output
Good or service that comes out of the process of production
Fixed Input
An input whose supply is inelastic in the short run
Variable Input
An input whose supply is elastic in the short run
Short Run
Refers to a period of time in which the supply of certain inputs is fixed or inelastic.
Long Run
Refers to a period of time in which the supply of all inputs is elastic, but not enough to permit a change in technology.
Where to locate the production unit? How much to produce in the short-run and in the long-run? What should be the scale of production? What should be the product-mix?
Production Function
The relationship between inputs to the production process & the resulting output is described by a production function. Qx=f(Ld, L, K,M,T, t) Qx=Output Ld=land L= labour K=capital M=materials T=technology t=time
Qx=f(L, K) Short Run production function (Single variable production function) Qx=f(L) Long Run production function Qx=f(L, K)
Laws of production
Short Run Laws of production Law of Diminishing Returns (Laws of Returns to Variable Inputs ) (Laws of Returns to Returns to Factor) (Law of Variable proportions) Long Run Laws of production Laws of Returns to Scale
MARGINAL PRODUCT(MP) MP is additional output attributed to an additional unit of the variable factor, other factor remaining constant AVERAGE PRODUCT(AP) AP is the output per unit of the variable factor used in the process of production
L(units of labour)
TP(total product)
AP(average product)
MP(marginal product)
1 2 3 4 5
RETURNS TO A FACTOR
Law of Diminishing Returns Or Law of Variable Proportions
Law of diminishing returns states that as more and more and more of the variable factor is combined with fixed factor, a stage must ultimately come when marginal product of the variable factor starts declining.
A Production Table
Number of workers 0 1 2 3 4 5 6 7 8 9 10 Total output 0 4 10 17 23 28 31 32 32 30 25 Marginal product 4 6 7 6 5 3 1 0 2 5 Average product 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5
A Production Function
32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 7 6 TP Output per worker 5 4 3 2 1 1 2 3 4 5 6 7 Number of workers 8 9 10 3 4 5 6 7 Number of workers (b) Marginal and average product 0 1 2 8 9 MP 10 AP
Output
Returns to Scale
Long Run Laws of production
Returns to scale relates to the behaviour of total output as all inputs are varied in same proportion and it is a long run.
Isoquants
Isoquant means that the quantities throughout a given isoquant are equal . An isoquant curve shows various combinations of 2 input factors such as capital and labour, which yield the same level of output.
Combinations A B C Capital (Rs. In lakh) 1 2 3 No.of Labourees 20 15 11
D E
4 5
8 6
Features Of an Isoquant
Downward sloping Convex to origin Do not intersect Do not touch axis
Isoquant map
Capital
Optimal combinaton
labour
35
Capital
Budget line
labour
36
Capital
Optimal combination
labour
37