Please enable JavaScript.
Coggle requires JavaScript to display documents.
Production Theory and Cost of Production Theory (Production Theory (A…
Production Theory and Cost of Production Theory
Production Theory
A firm's
objective is to maximize profits. The way is to minimise cost between price and quantity.
Explicit costs
is a direct payment made to others in the course of running a business. Such as wage, rent and materials.
Implicit cost
is the oppurtunity cost equal to what a firm must give up in order to use a factor of production for which it ready owns and thus does not to pay rent.
Costs
is an amount that has to be paid or spent to buy or obtian something.
Profits
is TR-TC
Production function
is relationship between the quantitiy of inputs used to produce a good in organization and quantity of output of good.
The marginal product
of any input is increase in output arising from an additional unit of the input, holding all other inputs.
Diminishing Marginal Product
is the marginal product of an input decline as the quantity of the input increase.
Cost of Production Theory
Marginal Cost
the increase in Total Cost from producing one more unit. @ TR/Q
Fixed costs
Remain the same, no matter how much output a company produces.
Variable costs
vary with the quantity produced.
Total costs
is FC+VC
Long run
is based on good where are no more fixed cost and become variable cost.
Short run
is fixed cost and variable cost
Why ATC is usually U-shaped
ATC is average total cost equal total cost diveded by the quantity of output
AFC + AVC
Because take its shape from AVC curve, with the upturn refecting the onset of diminishing returns to the variable factor.
AFC is downward sloping
AFC is the highers average cost compared with AVC.
cost of ATC is rises later.
AVC is the higher of output curve.
The quantity that minimizes ATC
ATC and MC
ATC curve intially will decline as fixed costs are spread over a larger number of units, but will go up as marginal costs increase due to the law of diminishing returns.
Mc is lower where the ATC is higher at the left side.
At the output curve, MC is increasing when ATC is decreasing.
ATC changees as Scale of Production Changes
ATC falls as Q increase
constant when ATC stays the same as Q increase
Diseconomies of scale when ATC rises as Q is increase