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Cost of Production
Factors
Fixed Factor
Variable Factor
Time Factor
Fixed Factors
Short-run
Long-run
Short-Run Production Relationship
Labor-Output relationship
Given fixed plant capacity
Assume
• Technology is fixed.
• Techniques of production do not change.
• All units of labor are of equal quality.
It refers to how the marginal contribution of a factor
of production usually decreases as more of the factor
is used
Each additional unit of the variable input (Labor)
yields smaller and smaller increases in output.
First labor employed gives more productivity as
compared to next last.
Law of Diminishing Returns
Total
Products
Quantity of Labor
TP
Relationship between MP and AP:
Total
Products When MP exceeds AP, AP rises, when
MP is less than AP, then AP declines.
Quantity of Labor
AP
Quantity of Labor / marginal and
average products
MP
Short-Run Production Cost:
Fixed cost
Variable Cost
Total Cost (FC+VC)
Variable cost can be controlled or altered in
short run but not Fixed cost.
Short-Run Production Cost:
ATC
AVC
AFC
Short-Run Production Cost:
ATC
AVC
AFC
Minimum Efficient Scale (MES)