Production Theory and Cost of Production Theory (Why ATC is usually U…
Production Theory and Cost of Production Theory
ATC changees as Scale of Production Changes
Diseconomies of scale when ATC rises as Q is increase
constant when ATC stays the same as Q increase
ATC falls as Q increase
ATC and MC
At the output curve, MC is increasing when ATC is decreasing.
Mc is lower where the ATC is higher at the left side.
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.
Why ATC is usually U-shaped
The quantity that minimizes ATC
AVC is the higher of output curve.
cost of ATC is rises later.
AFC is the highers average cost compared with AVC.
AFC is downward sloping
Because take its shape from AVC curve, with the upturn refecting the onset of diminishing returns to the variable factor.
AFC + AVC
ATC is average total cost equal total cost diveded by the quantity of output
Cost of Production Theory
is fixed cost and variable cost
is based on good where are no more fixed cost and become variable cost.
vary with the quantity produced.
Remain the same, no matter how much output a company produces.
the increase in Total Cost from producing one more unit. @ TR/Q
Diminishing Marginal Product
is the marginal product of an input decline as the quantity of the input increase.
The marginal product
of any input is increase in output arising from an additional unit of the input, holding all other inputs.
is relationship between the quantitiy of inputs used to produce a good in organization and quantity of output of good.
is an amount that has to be paid or spent to buy or obtian something.
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.
is a direct payment made to others in the course of running a business. Such as wage, rent and materials.
objective is to maximize profits. The way is to minimise cost between price and quantity.