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Production and Costs

Production: – It is mainly transformation of resources into commodities. 

Production Function: Physical inputs. Production function of a firm describes the relationship between the output and the factors of production which are being used in the production process. It shows the required number of inputs needed to produce the maximum level of final output  

Marginal product refers to the change in total product resulting from the employment of an additional unit of variable factor. In other words, it is the contribution of each additional unit of variable factor to output.  

Economic Cost: It is the sum total of explicit and implicit cost.  

Explicit Cost: Actual money expenditure incurred by a firm on the purchase and hiring the factor inputs for the production is called explicit cost. These are entered into books of accounts. For example-payment of wages, rent, interest, purchases of raw materials etc. 

Implicit cost is the cost of self-owned resources of the production used in production process. Or estimated value of inputs supplied by owner itself. These are not entered into books of accounts  

Total cost refers to total amount of money which is incurred by a firm on production of a given amount of a commodity. Total cost is the sum of total fixed cost and total variable cost. 

TC = TFC + TVC or TC = AC × Q 

Total fixed cost: – It is also called supplementary cost. It is the total expenditure incurred by the producer for employing fixed inputs. Ex- Rent of land and building, interest on capital, license fee etc.  

Features of Total Fixed Cost:-  

  1. It remains constant at all levels of output. It is not zero even at zero output level. Therefore, TFC curve is parallel to X-axis.  
  1. Total cost at zero level of output is equal to total fixed cost.  
  1. Total variable cost is the cost which vary with the quantity of output produced. It is zero at zero level of output. TVC curve is parallel to TC curve. Ex-cost of raw material, expenses on power etc.  
Normal Profit: - It is a no profit no loss situation. It is the minimum retum that a producer 
expects from his capital invested in the business. 
Break-even Point: - At this point, finn is eaming zero economic profit or normal profit. 
OR we can say it is just covering all its costs. 
Shut-down Point: - It occurs when a finn is covering its variable costs only, here, the finn 
is incun•ing loss of fixed cost. 
Supply: Refers to the amount ofthe commodity that a finn or seller is willing to sell at 
different prices during a given period of time.

Money received from the sale of product is called revenue. 

Total revenue is the total amount of money received by a firm from the sale of given units of a commodity.  

Per unit revenue received from the sale of given units of a commodity is called average revenue. Average revenue is equal to price. Per unit price of a commodity is also called AR.  

Marginal revenue is net addition to total revenue when one additional unit of output is sold.  

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