Production Theory

Production

Creation of U in a certain G or S as

a result of which it commands P in

the market
 Production Function

P.F is a schedule or mathematical equation

that gives max quantity of output that can be

produced from specified sets of input while

techniques of production are given

P = F (A, B, C, D)
 Production Unit:-
A unit where four factors of Production are
combined to produce Goods or Services
 Firm:-
An exact body that own or controls
Production of 1 or more G & S
 Industry:-
Group of Production units / Firms
producing same product
 Firm Product, Cost & Revenue
 Firm has to make 3 decisions:-
(i) How much to P ?
(ii) What will be total cost of Production ?
(iii) How much revenue will be obtained ?
 Decisions carefully taken to obtain max
profit
PROFIT = TR - TC
Total Product (TP):-

Having employed certain no of L,

what so ever is produced by firm
Average Product (AP):-

Dividing TP by unit of L
AP = TP
L
 Marginal Product (MP)

 Addition to total output that results by

employment of additional L

MP = Q = dQ

L dL

 MP give slope of TP
 Firm Cost

 TC

 AC

 MC
 TC
(a) TFC => cost borne ever if firm isn’t operating
(b) TVC => bears regarding valuable factor of
Production
TC = TFC + TVC
e.g.
for 100 units
TC = TFC + TVC
= 6000 + 8000
= 14000
 AC
Cost per unit [ cost divided by unit ]
AC = AFC + AVC
e.g.
AFC = TFC = 6000 = 60
Q 100
AVC = TVC = 8000 = 80
Q 100
AC = 60 + 80 = 140
 MC
Net change TC by having produced
additional units of any G
MC = d TC
dQ
e.g. Q TC
100 1200
101 1210
d TC = 10 = 10
dQ 1
 Firm Revenue

 TR:-

Obtained by combining sale of all units

e.g. 100 units , 5 Rp each

TR = 5 x 100 = 500
 Firm Revenue

AR:-

Dividing TR by units of output sold

TR = 500 = 5

Q 100
 Firm Revenue

 MR:-

Each addition made to TR by sale of extra

unit

Units 101, P = 5 Rp

TR = 5 x 101 = 505