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Production Function

The document outlines various types of costs in production, including fixed, variable, and total costs, as well as average costs and marginal cost calculations. It also discusses the production function, total product, marginal product, average product, and the law of diminishing returns, distinguishing between short run and long run scenarios. Key concepts include economies of scale and the behavior of costs as output changes.

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Јелена Ј.
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7 views4 pages

Production Function

The document outlines various types of costs in production, including fixed, variable, and total costs, as well as average costs and marginal cost calculations. It also discusses the production function, total product, marginal product, average product, and the law of diminishing returns, distinguishing between short run and long run scenarios. Key concepts include economies of scale and the behavior of costs as output changes.

Uploaded by

Јелена Ј.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

1.

Types of Costs
 Fixed Costs (FC):
Costs that do not change with output (e.g., rent, salaries).
 Variable Costs (VC):
Costs that change with output (e.g., materials, hourly wages).
 Total Cost (TC):
TC = FC + VC

2. Average Costs
 Average Total Cost (ATC):
ATC = TC ÷ Q
(Total cost per unit of output)
 Average Fixed Cost (AFC):
AFC = FC ÷ Q
(Fixed cost per unit of output)
 Average Variable Cost (AVC):
AVC = VC ÷ Q
(Variable cost per unit of output)

3. Marginal Cost (MC)


 Marginal Cost:
MC = change in TC ÷ change in Q
(Cost of producing one more unit)
 Behavior:
MC usually goes down at first, then up due to diminishing returns.
 MC crosses ATC and AVC at their lowest points.
4. Long Run Costs
 All inputs are variable in the long run.
 Economies of Scale:
Long-run average cost decreases as output increases.
 Diseconomies of Scale:
Long-run average cost increases as output increases.
 Constant Returns to Scale:
Long-run average cost stays the same as output changes.
1. Production Function (Basic Idea)
Output depends on inputs like labor (L) and capital (K).
Simple formula:
Q=a×L+b×K
Where:
 Q = quantity of output
 L = labor input (e.g., number of workers)
 K = capital input (e.g., number of machines)
 a = output per unit of labor
 b = output per unit of capital

2. Total Product (TP)


 Total amount of output produced with a certain amount of input.
 TP changes as you add more labor or capital.

3. Marginal Product (MP)


 Extra output from adding one more unit of labor (or other input).
 Formula:
MP = change in TP ÷ change in labor
(How much output increases when labor increases by one unit)

4. Average Product (AP)


 Output per unit of labor (or other input).
 Formula:
AP = TP ÷ L
(Total output divided by number of workers)
5. Law of Diminishing Returns
 As more labor is added to fixed capital, MP will eventually decrease.
 Means adding more workers produces less extra output after a point.

6. Short Run vs Long Run


 Short Run: Some inputs (usually capital) are fixed.
 Long Run: All inputs can be changed.

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