ZeePedia

BACKGROUND TO SUPPLY/COSTS:PRODUCTIVE THEORY

<< BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….):Normal Goods and Giffen Good
BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):The Scale of Production >>
img
Introduction to Economics ­ECO401
VU
UNIT - 5
Lesson 5.1
BACKGROUND TO SUPPLY/COSTS
PRODUCTIVE THEORY
A firm is any organized form of production, in which someone or a collection of individuals are
involved in the production of goods and services. A firm can be sole proprietorship (one
person ownership), partnership (a limited number of owners) or a limited company (a large
number of changing shareholders).
A firm is faced with three basic questions:
a. What should it produce?
b. How should it produce it and
c. How much profit/net benefit will the firm make?
The traditional theory of the firm says that the firm's basic goal is to maximize profits.
Production Function:
A production function is simply the relationship between inputs & outputs.
Mathematically it can be written as:
Q = f (K, L, N, E, T, P..........)
Where,
Q = Output = Total product produced
K = Capital
L = Labor
N = Natural resources
E = Entrepreneurship
T = Technology
P = Power
Cobb Douglas production function:
In economics, the Cobb-Douglas functional form of production functions is widely used to
represent the relationship of an output to inputs. It was proposed by Knut Wicksell, and tested
against statistical evidence by Paul Douglas and Charles Cobb in 1928.
Cobb Douglas production function can be represented by the following equation,
Q = A Kα L1 ­ α
Where:
Q = output
L = labor input
K = capital input
A, α and 1 ­ α are constants determined by technology.
Short run and Long run:
Short run is a period of time in which at least one of the factors of production is fixed or
unchangeable; long run is a period of time in which all the factors of production used in the
production are flexible. The actual length of the short run and long-run can vary considerably
from industry to industry.
The Law of Diminishing Marginal Returns:
The law of diminishing marginal returns states that as you increase the quantity of a variable
factor together with a fixed factor, the returns (in terms of output) become less and less. Thus
if we are using labor in the production of wheat given a fixed amount of land, after a certain
39
img
Introduction to Economics ­ECO401
VU
point the increase in the output of wheat will become less and less until it starts reducing the
total output of wheat.
The total physical product (TPP) of a factor (F) is the latter's total contribution to output
measured in units of output produced.
Average physical product (APP) is TPP per unit of the variable factor:
APP can be represented by the following formula,
APP = TPPF/QF
Marginal physical product (MPP) is the addition to TPP brought by employing an extra unit
of the variable factor More generally,
MPPF = ĆTPPF/ĆQF
Relationship between APP and MPP:
·  If the marginal physical product equals the average physical product, the average
physical product will not change.
If the marginal physical product is above the average physical product, the average
·
physical product will rise.
If the marginal physical product is below the average physical product the average
·
physical product will fall.
40
Table of Contents:
  1. INTRODUCTION TO ECONOMICS:Economic Systems
  2. INTRODUCTION TO ECONOMICS (CONTINUED………):Opportunity Cost
  3. DEMAND, SUPPLY AND EQUILIBRIUM:Goods Market and Factors Market
  4. DEMAND, SUPPLY AND EQUILIBRIUM (CONTINUED……..)
  5. DEMAND, SUPPLY AND EQUILIBRIUM (CONTINUED……..):Equilibrium
  6. ELASTICITIES:Price Elasticity of Demand, Point Elasticity, Arc Elasticity
  7. ELASTICITIES (CONTINUED………….):Total revenue and Elasticity
  8. ELASTICITIES (CONTINUED………….):Short Run and Long Run, Incidence of Taxation
  9. BACKGROUND TO DEMAND/CONSUMPTION:CONSUMER BEHAVIOR
  10. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….)
  11. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….)The Indifference Curve Approach
  12. BACKGROUND TO DEMAND/CONSUMPTION (CONTINUED…………….):Normal Goods and Giffen Good
  13. BACKGROUND TO SUPPLY/COSTS:PRODUCTIVE THEORY
  14. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):The Scale of Production
  15. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):Isoquant
  16. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):COSTS
  17. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):REVENUES
  18. BACKGROUND TO SUPPLY/COSTS (CONTINUED…………..):PROFIT MAXIMISATION
  19. MARKET STRUCTURES:PERFECT COMPETITION, Allocative efficiency
  20. MARKET STRUCTURES (CONTINUED………..):MONOPOLY
  21. MARKET STRUCTURES (CONTINUED………..):PRICE DISCRIMINATION
  22. MARKET STRUCTURES (CONTINUED………..):OLIGOPOLY
  23. SELECTED ISSUES IN MICROECONOMICS:WELFARE ECONOMICS
  24. SELECTED ISSUES IN MICROECONOMICS (CONTINUED……………)
  25. INTRODUCTION TO MACROECONOMICS:Price Level and its Effects:
  26. INTRODUCTION TO MACROECONOMICS (CONTINUED………..)
  27. INTRODUCTION TO MACROECONOMICS (CONTINUED………..):The Monetarist School
  28. THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME
  29. THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME (CONTINUED……………..)
  30. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME
  31. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME (CONTINUED………..)
  32. MACROECONOMIC EQUILIBRIUM & VARIABLES; THE DETERMINATION OF EQUILIBRIUM INCOME (CONTINUED………..):The Accelerator
  33. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS
  34. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….)
  35. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Causes of Inflation
  36. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):BALANCE OF PAYMENTS
  37. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):GROWTH
  38. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Land
  39. THE FOUR BIG MACROECONOMIC ISSUES AND THEIR INTER-RELATIONSHIPS (CONTINUED…….):Growth-inflation
  40. FISCAL POLICY AND TAXATION:Budget Deficit, Budget Surplus and Balanced Budget
  41. MONEY, CENTRAL BANKING AND MONETARY POLICY
  42. MONEY, CENTRAL BANKING AND MONETARY POLICY (CONTINUED…….)
  43. JOINT EQUILIBRIUM IN THE MONEY AND GOODS MARKETS: THE IS-LM FRAMEWORK
  44. AN INTRODUCTION TO INTERNATIONAL TRADE AND FINANCE
  45. PROBLEMS OF LOWER INCOME COUNTRIES:Poverty trap theories: