production function

PPRODUCTIONRODUCTION F FUNCTIONUNCTION TTYPEYPE OOFF PPRODUCTION RODUCTION

FFUNCTION UNCTION

1. L1. LINEAR INEAR OOR R HHOMOGENEOUSOMOGENEOUS

2. N2. NONON L LINEARINEAR O ORR H HOMOGENEOUSOMOGENEOUS

3. S3. SHORTHORT R RUNUN P PRODUCTIONRODUCTION F FUNCTIONUNCTION

4. L4. LONGONG R RUN UN PPRODUCTIONRODUCTION F FUNCTIONUNCTION

TTWO WO AASPECTS OF SPECTS OF PPRODUCTION:RODUCTION:

1. COST ANALYSIS1. COST ANALYSIS

2. REVENUE ANALYSIS2. REVENUE ANALYSIS

COST ANALTSISCOST ANALTSIS

1.1. SHORT RUN COSTSHORT RUN COST

FIXED FACTORSFIXED FACTORS VARIABLE FACTORSVARIABLE FACTORS

2. LONG RUN COST2. LONG RUN COST

TYPE OF COST IN SHORT TYPE OF COST IN SHORT PERIODPERIOD

1.1. FIXED COSTFIXED COST FIXED COST CAN NEVER ZEROFIXED COST CAN NEVER ZERO TFC REMAIN FIXEDTFC REMAIN FIXED AFC WILL GO ON DIMINISHINGAFC WILL GO ON DIMINISHING

AFC=TFC/OUTPUT

GRAPHICAL REPRESENTATIONGRAPHICAL REPRESENTATION

UNITUNIT TFCTFC AFCAFC

00

11

22

33

44

55

100100

100100

100100

100100

100100

100100

__

100100

5050

3333

2525

2020

100

80

70

60

40

20

1 2 3 4 50

TFC

AFC

UNIT

TFCAFC

VARIABLE COSTVARIABLE COST VARIABLE COST CAN BE ZEROVARIABLE COST CAN BE ZERO TVC INCREASES OR DECREASESTVC INCREASES OR DECREASES AVC DIMINISHING UPTO A POINT THEN AVC DIMINISHING UPTO A POINT THEN

INCREASINGINCREASING

AVC=TVC/OUTPUT

GRAPHICAL REPRESENTATIONGRAPHICAL REPRESENTATION

UNITUNIT

11

22

33

44

55

66

77

TVC1TVC100

1010

1515

2424

2525

3030

4242

5656

AVCAVC

1010

99

88

77

66

77

8810

20

30

40

50

60

0 1 2 3 4 5 6 7

TVC

AVC

WHY AC IS U-SHAPED?WHY AC IS U-SHAPED?

At first AFC or AVC falls, At first AFC or AVC falls, as a result AC also falls. as a result AC also falls. After a point AFC start After a point AFC start falling at low rate,whereas falling at low rate,whereas AVC start rising at a AVC start rising at a greater rate. As a result greater rate. As a result AC start rising,it become AC start rising,it become U-Shaped.U-Shaped.

AC=AFC+AVC

UNIT

AC

RREVENUE EVENUE AANALYSISNALYSIS

REVENUE ANALYSIS

TOTAL REVENUE AVERAGE REVENUE MARGINAL REVENUE