UNIT III PRODUCTION AND COST ANALYSIS

Processes and methods employed in transformation of tangible inputs raw materials, semi-finished goods or sub assemblies) and intangible inputs (ideas, information, know how) into goods or services.

Input & Output

An input is a good or services that goes in to the process of production. Baumol an input is simply anything which the firm buys for use in its production or other processes. It includes

Labour Capital land Raw materials time

Fixed & Input Variables: A fixed factor is one that remains constant for a certain level of output. The supply is constant in short run. A variable input is defined as one that changes with change in output. Supply keeps changing

Production Function It describes the technological relationship between input-output in physical terms. An empirical Production function: Q = f (Ld, L,K,M,T,t)
Ld = Land & Building L = Labour K= Capital M = Materials T = Technology t= time

Economists uses only two variables Q = f ( L , K) Production function could be Short-run production function Q = f (L) Long-run production function Q = f ( L , K) Assumptions: 1. Perfect divisibility of both inputs & outputs 2. There are only two factors of production Labour & Capital 3. Limited substitution of one factor for the other 4. A given technology 5. Inelastic supply of fixed factors in the short run

Laws of Production
It states the relationship between output and input. *Production function with one variable input *Production function with two variable inputs *Production function with all variable inputs Q = -L3 + 15L2 +10 L

Three Stages of Production

No.of workers 1 2 Total product 24 72 Marginal product 24 48 Average product 24 36 I Stages of production

3 4
5 6 7 8 9 10 11

138 216
300 384 462 528 576 600 594

66 78
84 84 78 66 48 24 -6

46 54
60 64 66 66 64 60 54

Increasing Returns

II decreasing Returns

III Negative

12

552

-42

46

Returns

Behaviour of TPP MPP and APP

Total physical product
Stage I Increases at an increasing rate

Marginal physical product

Increases, reaches its maximum and then declines till MR = AP

Average physical product

Increases, reaches its maximum

Stage II Increases at a diminishing rate till it reaches maximum

Stage III Starts declining

Is diminishing and becomes Zero

Starts diminishing

Becomes negative

Continues to decline