04 theory of production and costs - 4.ppt

THEORY OF PRODUCTION and COSTS
ADVICE TO ALL EMPLOYEES

1. Build a home earlier. Be it rural home or urban home. Building a house at 50 is not an achievement. Don't get used to government houses. This comfort is so dangerous. Let all your family have good time in your house.

2. Go home. Don't stick at work all the year. You are not the pillar of your department. If you drop dead today, you will be replaced immediately and operations will continue. Make your family a priority.

3. Don't chase promotions. Master your skills and be excellent at what you do. If they want to promote you, that's fine if they don't, stay positive to your personal.
development.

4. Avoid office or work gossip. Avoid things that tarnish your name or reputation. Don't join the bandwagon that backbites your bosses and colleagues. Stay away from negative gatherings that have only people as their agenda.

5. Don't ever compete with your bosses. You will burn your fingers. Don't compete with your colleagues, you will fry your brain.

6. Ensure you have a side business. Your salary will not sustain your needs in the long run.

7. Save some money. Let it be deducted automatically from your payslip.

8. Borrow a loan to invest in a business or to change a situation not to buy luxury. Buy luxury from your profit.

9. Keep your life,marriage and family private. Let them stay away from your work. This is very important.

10. Be loyal to yourself and believe in your work. Hanging around your boss will alienate you from your colleagues and your boss may finally dump you when he leaves.

11. Retire early. The best way to plan for your exit was when you received the employment letter. The other best time is today. By 40 to 50 be out.

12. Join work welfare and be an active member always. It will help you a lot when any eventuality occurs.

13.Take leave days utilize them by developing yr future home or projects..usually what you do during yr leave days is a reflection of how you'll live after retirement..If it means you spend it all holding a remote control watching series on Zee world, expect nothing different after retirement.

14. Start a project whilst still serving or working. Let your project run whilst at work and if it doesn't do well, start another one till it's running viably. When your project is viably running then retire to manage your business. Most people or pensioners fail in life because they retire to start a project instead of retiring to run a project.

15. Pension money is not for starting a project or buy a stand or build a house but it's money for your upkeep or to maintain yourself in good health. Pension money is not for paying school fees or marrying a young wife but to look after yourself.

16. Always remember, when you retire never be a case study for living a miserable life after retirement but be a role model for colleagues to think of retiring too.

17. Don't retire just because you are finished or you are now a burden to the compa

1. Theory of Production
and cost
Week 4

2. Theory of Production and Cost
Short and Long run production functions
Behavior of Costs
Law of Diminishing Returns
Law of Returns to scale in the theory of production
Fixed Costs and Variable Costs
Explicit Costs and Implicit Costs

3. What are Costs?
“The Market Value of the inputs a firm uses in production”
Total Revenue –the amount a firm receives for the sale of its
outputs.
Eg: Each Ice-Cream takes Rs. 10 to make and it is sold at Rs.
25 –Nelum sells 2000 ice-creams
You know you're getting old when the candles
cost more than the cake.
Bob Hope

4. Economic Cost
This is different to accounting cost
What is accounting cost?
Remember Nelum? –She made Rs. 30000 profit
making ice-cream. Assume Nelum was an amazing
programmer and she could earn Rs. 80000 a month
programming.
Her Opportunity cost = 80000 –30000 = Rs. 50000
Which means she is losing Rs 50000 by making ice-
cream.

5. Implicit and Explicit Costs
Explicit Costs –input costs that require an outlay of money by the firm.
Implicit costs –input costs that do not require an outlay of money by the
firm.
Accounting Profit = TR –Explicit Costs
Economic Profit = TR –(Implicit Costs+ Explicit Costs)
No other investment yields as great a return as the
investment in education. An educated workforce is the
foundation of every community and the future of every
economy.
Brad Henry

6. 10 10
10
10
30
20
0
5
10
15
20
25
30
35
Economic Profit Total Revenue Accounting Profit
Profit
Implicit Cost
Explicit Cost

7. The production functions
Two Assumptions
Short Run
Size of Nelum’sfactory is fixed
She can only vary the amount of ice-cream by increasing
workers
Long run –She can build a new factory.
The production function
The relationship between the quantity of inputs used to make a
good and he quantity of outputs for that good.

8. Output
per Hour
Marginal
product of
labour
Cost of
factory
(FC)
Cost of
workers
(VC)
Number of
Workers
Total Cost
0 0 0 30 0 30
1 50 50 30 10 40
2 90 40 30 20 50
3 120 30 30 30 60
4 140 20 30 40 70
5 150 10 30 50 80
6 155 5 30 60 90

9. Production Function
0, 0
1, 50
2, 90
3, 120
4, 140
5, 150
6, 155
0 1 2 3 4 5 6 7
Output per Hour
Output per Hour

10. Total Cost Curve
Marginal Product
The increase in output that arises from an additional unit of
output
Diminishing Marginal Product
The property whereby the marginal product of an input
declines as the quantity of the input increases.

11. 0
10
20
30
40
50
60
70
80
90
100
0 20 40 60 80 100 120 140 160 180
Total Cost
Total Cost

12. Fixed and Variable Costs
Fixed Costs
Costs that do not vary with the quantity of output produced
Variable Costs
Costs that vary with the quantity of output produced.
Average Total Cost –Total cost divided by the quantity of
output
Average Fixed Cost –Fixed cost divided by the quantity of
output
Average Variable Cost –Variable cost divided by the quantity of
output
Marginal Cost –The increase in total cost that arises from an
extra unit of production.

13. Cups
Per
Hour
Total
Cost
Fixed
Cost
Variable
Cost
Average Fixed
Cost
Average
Variable Cost
Average Total
Cost
Marginal
Cost
0 300 300 0 0 0 0
1 330 300 30 300 30 330
2 380 300 80 150 40 190
3 450 300 150 100 50 150
4 540 300 240 75 60 135
5 650 300 350 60 70 130
6 780 300 480 50 80 130
7 930 300 630 43 90 133
81100 300 800 38 100 138
91290 300 990 33 110 143
101500 300 1200 30 120 150

14. 0
50
100
150
200
250
300
350
0 1 2 3 4 5 6 7 8 9 10
Average Fixed Cost Average Variable Cost
Average Total Cost

15. Observations
Rising Marginal Cost
MC rises with the quantity of out produced. This reflects the
property of diminishing marginal product.
U-Shaped Average Total Cost
Average fixed costs always reduces
Average variable costs typically rises as output increases
because of diminishing marginal product
The bottom of the U shaped curve occurs at the
quantity that minimizes average total cost

16. Long run costs curves
In the short term you cannot increase the number of
factories, only the number of workers
In the long run this is not an issue.
Economies of Scale –(Specialization) –When long run
average total costs falls as the quantity of output increases
Diseconomies of Scale –(Coordination Issue) –When LRATC
increase as the output increases
Constant returns of scale –When LRATC stays the same as
the quantity of output changes.

18. Break Time!