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    Theory of Production and Cost PDF

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    Saurav Goyal
    This document provides an overview of key concepts in business organizations and production economics including: - Types of business organizations like proprietorships and partnerships - Definitions of key terms like "firm" and reasons why firms exist like reducing transaction costs - Objectives of firms like maximizing output and profits - Concepts of production functions, costs, and cost curves - Relationships between average and marginal costs and how they impact cost curves - Differences between fixed, variable, and sunk costs and their relevance - Economies and diseconomies of scale and their impacts on long-run average costs

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    Download as PDF, TXT or read online from Scribd

    Theory of Production and Cost PDF

    Uploaded by

    Saurav Goyal
    4K views24 pages
    This document provides an overview of key concepts in business organizations and production economics including: - Types of business organizations like proprietorships and partnerships - Definitions of key terms like "firm" and reasons why firms exist like reducing transaction costs - Objectives of firms like maximizing output and profits - Concepts of production functions, costs, and cost curves - Relationships between average and marginal costs and how they impact cost curves - Differences between fixed, variable, and sunk costs and their relevance - Economies and diseconomies of scale and their impacts on long-run average costs

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    theory production costs micro economoics finance business etc.

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    Theory of Production and cost.pdf

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    This document provides an overview of key concepts in business organizations and production economics including: - Types of business organizations like proprietorships and partnerships - Definitions of key terms like "firm" and reasons why firms exist like reducing transaction costs - Objectives of firms like maximizing output and profits - Concepts of production functions, costs, and cost curves - Relationships between average and marginal costs and how they impact cost curves - Differences between fixed, variable, and sunk costs and their relevance - Economies and diseconomies of scale and their impacts on long-run average costs

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    4K views24 pages

    Theory of Production and Cost PDF

    Uploaded by

    Saurav Goyal
    This document provides an overview of key concepts in business organizations and production economics including: - Types of business organizations like proprietorships and partnerships - Definitions of key terms like "firm" and reasons why firms exist like reducing transaction costs - Objectives of firms like maximizing output and profits - Concepts of production functions, costs, and cost curves - Relationships between average and marginal costs and how they impact cost curves - Differences between fixed, variable, and sunk costs and their relevance - Economies and diseconomies of scale and their impacts on long-run average costs

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    You are on page 1of 24

    PGP I Term I

    Broad types of businesses organizations


    Proprietorship

    Partnership
    Corporations

    What is a firm?
    Specialized organization devoted to managing the process of production
    Produce goods or services Raise resources Manage and coordinate production process

    Why do firms exist?


    Transaction cost (Ronald Coase, 1937)-specific assets, contractual issues, hold up problems Horizontal and vertical boundaries of firms

    Firms objectives
    1. Produce maximum output from given level of inputs (technical efficiency) 2. Produce at least cost (cost efficiency), given
    The output level Price of inputs
    3. Supply output that maximize profit

    Production function

    Cost min. subject to output level

    Production with one variable input

    Production with one variable input


    Labour(L) 0 Total output 0 AP MP -

    1 2 3 4 5 6 7 8 9 10

    10 30 60 80 95 108 112 112 108 100

    10 15 20 20 19 18 16 14 12 10

    10 20 30 20 15 13 4 0 -4 -8

    Product curves
    Output
    112 80

    D C B A
    2 3 4

    60 30 AP, MP

    Labour

    Stage I

    Stage II

    Stage III

    Labour

    Relationship between AP and MP

    Technology improvement/Change in K

    Output Q3 Q2 Q1 A B C

    L1 L2

    L3

    Labour

    Returns to scale (all inputs are variable)

    Which cost matters and which does not?


    Opportunity cost matters in economic decision making. Sunk cost-Should be ignored; opportunity cost is zero

    Fixed versus variable cost


    Fixed cost versus sunk cost Marginal and average cost

    Short run costs

    Relationship between short run production and short run costs

    The shapes of the cost curves


    Cost Total cost B A Fixed cost Output Variable cost

    The shapes of the cost curves


    Cost

    MC

    ATC
    AVC

    AFC

    Output

    Relationship between AC and MC

    Relationship between Average and Marginal costs


    If MC > ATC, then ATC is rising. If MC = ATC, then ATC is at its low point. If MC < ATC, then ATC is falling.
    If MC > AVC, then AVC is rising. If MC = AVC, then AVC is at its low point. If MC < AVC, then AVC is falling.

    Long run cost curves


    Cost

    LRMC

    LRAC

    Output

    Economies of scale
    Long run AC falls if economies of scale Long run AC rises if diseconomies of scale

    Reasons for economies of scale:


    Specialization and IRS Cheaper inputs, loans Lower advertising cost/marketing cost

    Reasons for diseconomies of scale


    Inefficient management and coordination issue Bulk effect disappears Specialization effect disappears and DRS

    Cost elasticity and economies of scale

    Returns to scale and cost


    IRS: LRAC exhibits economies of scale CRS: LRAC is constant as output increases DRS: LRAC exhibits diseconomies of scale

    Exercise
    1. Assume that the

    marginal cost of production is increasing. Can you determine whether the average variable cost is increasing or decreasing? Explain. 2. Assume that the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing? Explain.

    3. If the firms average cost curves are U-shaped, why does its average variable cost curve achieve its minimum at a lower level of output than the average total cost curve?

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