MANAGERIAL UNIT-2

ECONOMICS BY: SNEHA KAUSHAL

TOTLA
SNEHA KAUSHAL TOTLA
CONTENTS
LAW OF VARIABLE PROPORTIONS
LAW OF RETURN
OPTIMAL INPUT COMBINATION
OUTPUT COST RELATIONS
ENGINEERING COST CURVESS
TECHNOLOGICAL CHANGE AND PRODUCT DECISIONS
REVENUE CURVES OF A FIRM
PRICE OUTPUT DECISIONS UNDER ALTERNATIVE MARKET STRUCTURE
SHUT DOWN POINTS
BAUMOL SALES MAXIMIZATION
ADVERTISING AND PRICE OUTPUT DECISIONS

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PRODUCTION FUNCTION
The functional relationship between factors of production and output.
Q=
Factors of production could be variable and fixed.
Assumptions:
Perfect divisibility of input and output
There are only two factors of production
Limited substitution of factors
A given technology
Inelastic supply of fixed factors in short run

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TYPES OF PRODUCTION
FUNCTION
Production
function

Short run- Long run-

Law of
Law of returns
variable
to scale
proportions
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SHORT RUN PRODUCTION
FUNCTION
Also known as “Law of variable proportions” or “Law of returns to a factor”.
Assumptions:
Labour is homogeneous
State of technology is given
Input prices are given

TP AP & MP
It states that as more and more of variable inputs are added to fixed input, the total
output will initially increase at an increasing rate, then at constant rate, but
eventually it will increase in diminishing returns

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LAW OF VARIABLE
PROPORTIONS

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LONG RUN PRODUCTION
FUNCTION
Also known as “Laws of returns to scale”.
When a firm increases both the inputs proportionately, there are 3 possibilities:
TP may increase more than proportionately- INCREASING RETURNS TO SCALE
TP may increase proportionately- CONSTANT RETURNS TO SCALE
TP may increase less than proportionately- DECREASING RETURNS TO SCALE

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LAW OF RETURNS TO SCALE

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LAW OF RETURNS TO SCALE

INCREASING RETURNS CONSTANT RETURNS DECREASING

RETURNS
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OPTIMAL INPUT
COMBINATION
Least cost combination of inputs to produce a specific quantity of output

Methods

Marginal
Isoquant
product
approach
approach
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ISOQUANT APPROACH
Also known as ‘equal product curve’ or ‘product indifference curve’
Assumptions:
There are only two inputs
The two inputs can substitute each other but at a diminishing rate
The technology of the product is given

Properties of isoquants:
Negative slope
Convex to the origin
Upper isoquant represents higher output

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COST CONCEPTS

TC
MC TVC

COS
T
AC TFC

AVC AFC

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COST SCHEDULE

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COST CURVES

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ENGINEERING COST CURVES

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REVENUE CURVES OF A FIRM

T
R

Revenu
e types
M A
R R
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HOW MUCH TO PRODUCE?

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 MARKET STRUCTURE
TYPES OF
MARKET
STRUCTURE

MONOPOLIS
PERFECT
TIC
COMPETITIO MONOPOLY OLIGOPOLY
COMPETITIO
N
N
https://www.investopedia.com/terms/p/perfectcompetition.asp
https://www.investopedia.com/terms/m/monopolisticmarket.asp
https://www.investopedia.com/ask/answers/121514/what-are-some-current-examples-oli
gopolies.asp

https://www.investopedia.com/ask/answers/032315/what-are-most-famous-monopolies.a SNEHA KAUSHAL TOTLA

CHARACTERISTICS OF
DIFFERENT MARKET
STRUCTURE

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PRICE AND OUTPUT
DECISIONS UNDER PERFECT
COMPETITION
SHORT RUN LONG RUN

Fig. 4.5 SUPERNORMAL PROFITS

Fig. 4.6 SUPERNORMAL LOSSES

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 PRICE AND OUTPUT DECISIONS
UNDER MONOPOLY
SHORT RUN LONG RUN

https://youtu.be/_zIEKeW51Ac
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PRICE AND OUTPUT
DECISIONS UNDER
MONOPOLISTIC COMPETITION
SHORT RUN LONG RUN

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PRICE AND OUTPUT
DECISIONS UNDER
OLIGOPOLY
SHORT RUN LONG RUN

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SHUT DOWN POINT

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BAUMOL SALES
MAXIMIZATION MODEL

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