Introduction

 Presented by:
M.Hamza saeed
M.Talha
Zain saeed
Khizar Hayat
 Topic name:
Cost of Production
 Presented to:
Sir Mazher Javed
 Production
Production means the creation of value or wealth by producing goods
and services.

Example:

Mass production. A factory that produces light

weight bicycle tires on a continuous flow
production line.
The Production Function
A Production Function is the relationship between
the quantity of input used to produce a good and the
quantity of output of that good.

Example:

• Farmer jack grows wheat.

• He has 5 acres of land.
• He can hire as many workers as he want.
Example:
L Q
(no of (bushels 3,000
Workers) Of wheat)
2,500

Quantity of output
0 0 2,000
1 1000
1,500
2 1800
3 2400 1,000

4 2800 500
5 3000
0
0 1 2 3 4 5
No. of workers
Factors of production
4 Factors of production
In economics factors of production are the resources
people use to produce goods and services.
 Land(include any natural resource)
 Labor(Effort that human contribute)
 Capital(include machinery, tools, buildings)
 Entrepreneurship(combines land, labor, capital in
new ways)
Production in the Short Run & Long Run

o The Short run is a period of time in which the

quantity of at least one input is fixed and the
quantity of the other input can be varied.
o Some factors of production are variable.

o The Long run is the period of time in which the

quantities of all inputs can be varied.
o All factors of production are variable.
Laws of Variable Proportions
This is the modern version of the law of diminishing
marginal returns. Under this law, it is assumed that
only one factor of production is variable while other
factors are fixed.

Prof. Benham state the law as follows :

“As the proportion of one
factor in a combination of factors is increased
after a point, the average and marginal
production of that factor will diminish.”
 Marginal product

The Marginal product of any input is the increase in

output arising from an additional unit of that input,
holding all other inputs constant.
MPL(Marginal product of labor)
∆Q = change in output, ∆L = change in labor
Marginal product of labor (MPL) = ∆Q
∆L
Example:
L Q (bushels
(no. of
MPL
workers) of wheat)

0 0
∆L = 1 ∆Q = 1000 1000
1 1000
∆L = 1 ∆Q = 800 800
2 1800
∆L = 1 ∆Q = 600 600
3 2400
∆L = 1 ∆Q = 400 400
4 2800
∆L = 1 ∆Q = 200 200
5 3000
Marginal product of capital

The marginal product of capital is the amount of

extra output the firm gets from an extra unit of
capital holding the amount of labor constant.
∆Q = change in output
∆k= change in capital

Marginal product of capital (MPK) ) = ∆Q

∆k
Economic Profit and Accounting
Profit
Accounting profit
= total revenue minus total explicit costs
Economic profit
= total revenue minus total costs (including
explicit and implicit costs)
Accounting profit ignores implicit costs,
so it’s higher than economic profit.