economics assignment

Consumer behavior and demand

MICROECONOMICS

Producer behavior and

supply

Production function

It refers to physical relationship between inputs and output under given technology.

Q= f(F1, F2, ………………….Fn)

Q stands for quantity of output

f stands for function of ( or depends upon)

F1, F2,…..Fn stand for various factor inputs needed to produce Q

Some important concepts

Total physical product: TPP means the total output of a commodity at a particular level of employment of a variable factor (say, labor) keeping all other factor inputs (capital etc) constant.

TPP= ∑ MPP

TPP= APP*N

Average physical product: it is per unit of a variable factor.

APP= total physical product/ total units of variable factor Marginal physical product: it is an

addition to the total product when an additional unit of a variable factor is employed.

MPP= total product/ inputs

Schedule of tpp, app, mpp

Number of workers (L)

Total output (TP) (thousands per year) (Q)

Marginal product(MPL = W Q/WL)

Average product(APL = Q/L)

0 0 - -

1 10 10 10

2 28 18 14

3 54 26 18

4 76 22 19

5 90 14 18

6 96 6 16

7 96 0 13.5

8 92 -4 11.5

Relationship between tpp ,app,mpp1a) If MP > 0, TP will be rising as L increases. The TP curve begins at the origin, increases at an increasing rate over the range 0 to 3, and then increases at a decreasing rate. The MP reaches a maximum at 3, which corresponds to an inflection point (x) on the TP curve. At the inflection point, the TP curve changes from increasing at an increasing rate to increasing at a decreasing rate.

b) If MP = 0, TP will be constant as L increases. The TP is constant between workers 6 and 7.

c) If MP < 0, TP will be declining as L increases. The TP declines beyond 7. Also, the TP curve reaches a maximum when MP = 0 and then starts declining when MP < 0.

2. MP intersects AP (MP = AP) at the maximum point on the AP curve. This occurs at labour input rate 4.5. Also, observe that whenever MP > AP, the AP is rising (upto number of workers 4.5) — it makes no difference whether MP is rising or falling. When MP < AP (from number the maximum point of AP. It is important to understand why. The key is that AP increases as long as the MP is greater than AP. And AP decreases as long as MP is less than AP. Since AP is positively or negatively sloped depending on whether MP is above or below AP, it follows that MP = AP at the highest point on the AP curve.

Stages of Production

Based on the behavior of MP and AP, economists have classified production into three stages:

Stage 1: MP > 0, AP rising. Thus, MP > AP.

Stage 2: MP > 0, but AP is falling. MP < AP but TP is increasing (because MP > 0).

Stage 3: MP < 0. In this case TP is falling.

Evaluate yourself

Why is the marginal product of labor likely to increase and then decline in the short run?

Faced with constantly changing conditions, why would a firm ever keep any factors fixed? What determines whether a factor is fixed or variable?

State clearly the relation between APL and MPL.

cOST It refers to money expenditure by a firm in production of a commodity is called the cost of production.

FIXED COST Fixed costs are costs that are independent of output. These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, etc

VARIABLE COST

Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc.

ATC, AVC, AC

• AVC, ATC and MC fall first, then reach a minimum and finally rise as output increases.

• The rate of change in MC is greater than that in AVC and therefore the MC is lowest at an output lower than the output at which AVC is lowest.

•The ATC falls for a longer range of output than the AVC and therefore the minimum ATC is at a larger output than the minimum AVC.

•MC = AVC, when AVC is lowest.

•MC = ATC, when ATC is minimum.

REVENUE

The amount of money that a company actually receives during a specific period

Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.

PROFIT MAXIMIZATION

Total profit= total revenue- total cost.

Condition for profit maximization:

MR= MC MR

MC

MR/MC

UNITS OF COMMODITY

OPTIMUM Q

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