Production and cost ca foundations.pdf eco
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About This Presentation
Ca foundation
Slide Content
By- Jasmeet Sir
Business Economics
THEORY OF PRODUCTION AND COST
One Shot
Business Economics
THEORY OF PRODUCTION AND COST
One Shot
Theory Of Production1
Theory Of Cost2
Theory Of Cost2
Topic :- MEANING OF PRODUCTION
▪According to James Bates and J.R. Parkinson “Production is the organized activity of
transforming resources into finished products in the form of goods and services, and
the objective of production is to satisfy the demand of such transformed resources”.
▪Production should not be taken to mean as the creation of matter, but it means to
create or add utility to things that already exist in nature.
▪For example, when a carpenter produces a table, he does not create the matter of
which the wood is composed of; he only transforms wood into a table. By doing so,
he adds utility to wood which did not have utility before.
▪According to James Bates and J.R. Parkinson “Production is the organized activity of
transforming resources into finished products in the form of goods and services, and
the objective of production is to satisfy the demand of such transformed resources”.
▪Production should not be taken to mean as the creation of matter, but it means to
create or add utility to things that already exist in nature.
▪For example, when a carpenter produces a table, he does not create the matter of
which the wood is composed of; he only transforms wood into a table. By doing so,
he adds utility to wood which did not have utility before.
Topic :- MEANING OF PRODUCTION
Production consists of various processes to add utility to natural resources for
gaining greater satisfaction from them by:
(a)Form Utility:
•Manufacturing processes transform raw materials into physical products with
utility.
•Examples: Turning a log of wood into a table or converting iron into a machine.
Production consists of various processes to add utility to natural resources for
gaining greater satisfaction from them by:
(a)Form Utility:
•Manufacturing processes transform raw materials into physical products with
utility.
•Examples: Turning a log of wood into a table or converting iron into a machine.
Topic :- MEANING OF PRODUCTION
(b) Place Utility:
i. Extraction from Earth:
•Resources like coal, minerals, and gold are extracted from mines and
supplied to markets.
•Enables utilization of resources that were previously inaccessible or of little
use.
(b) Place Utility:
i. Extraction from Earth:
•Resources like coal, minerals, and gold are extracted from mines and
supplied to markets.
•Enables utilization of resources that were previously inaccessible or of little
use.
Topic :- MEANING OF PRODUCTION
ii.Transfer to Areas of Greater Use:
•Goods are moved from locations where they provide limited satisfaction
to places where their utility is higher.
•Example: Apples in Kashmir orchards gain utility when transported to
densely populated city centers where more people can benefit from them.
ii.Transfer to Areas of Greater Use:
•Goods are moved from locations where they provide limited satisfaction
to places where their utility is higher.
•Example: Apples in Kashmir orchards gain utility when transported to
densely populated city centers where more people can benefit from them.
Topic :- MEANING OF PRODUCTION
(c)Time Utility:
•Materials are made available during periods when they are typically
unavailable.
•Harvested food grains are stored for use between harvests.
•Seasonal fruits are canned to be enjoyed during the off-season.
•Confers utility by providing access to resources when they are most needed.
(c)Time Utility:
•Materials are made available during periods when they are typically
unavailable.
•Harvested food grains are stored for use between harvests.
•Seasonal fruits are canned to be enjoyed during the off-season.
•Confers utility by providing access to resources when they are most needed.
Topic :- MEANING OF PRODUCTION
(d)Service Utility (Personal Skills):
•Personal skills in the form of services contribute to utility.
•Examples: Organizers, merchants, transport workers, and other service
providers.
•Their expertise and efforts enhance the overall utility of goods and services.
(d)Service Utility (Personal Skills):
•Personal skills in the form of services contribute to utility.
•Examples: Organizers, merchants, transport workers, and other service
providers.
•Their expertise and efforts enhance the overall utility of goods and services.
Topic :- FACTORS OF PRODUCTION
•Factors of production are inputs that a firm purchases for use in its
production process.
•The four factors of production are land, labour, capital, and
entrepreneurial ability.
•Factors of production are inputs that a firm purchases for use in its
production process.
•The four factors of production are land, labour, capital, and
entrepreneurial ability.
Topic :- FACTORS OF PRODUCTION
A.Land
The term ‘land’ is used in a special sense in Economics. It does not mean soil or
earth’s surface alone, but refers to all free gifts of nature which would include
besides land in common parlance, natural resources, fertility of soil, water, air,
light, heat natural vegetation etc.
A.Land
The term ‘land’ is used in a special sense in Economics. It does not mean soil or
earth’s surface alone, but refers to all free gifts of nature which would include
besides land in common parlance, natural resources, fertility of soil, water, air,
light, heat natural vegetation etc.
Topic :- Characterstics of Land
(i) Land is a free gift of nature
(ii) Supply of land is fixed: Land is strictly limited in quantity. The total
supply of land is perfectly inelastic from the point of view of the
economy. However, it is relatively elastic from the point of view of a firm.
(iii) Land is permanent and has indestructible powers
(iv)Land is a passive factor: Unless human effort is exercised on land, it does
not produce anything on its own.
(v) Land is immobile
(vi) Land has multiple uses
(vii) Land is heterogeneous: No two pieces of land are alike. They differ in
fertility and situation.
(i) Land is a free gift of nature
(ii) Supply of land is fixed: Land is strictly limited in quantity. The total
supply of land is perfectly inelastic from the point of view of the
economy. However, it is relatively elastic from the point of view of a firm.
(iii) Land is permanent and has indestructible powers
(iv)Land is a passive factor: Unless human effort is exercised on land, it does
not produce anything on its own.
(v) Land is immobile
(vi) Land has multiple uses
(vii) Land is heterogeneous: No two pieces of land are alike. They differ in
fertility and situation.
Topic :- Labour
B. Labour
•Labour involves various types of human efforts that require physical
exertion, skill, and intellect, aimed at producing goods or services.
•Economic significance is attached to labour when it is performed with
the motive of receiving economic rewards.
•Work done out of love or affection, despite its contribution to human
well-being, is not considered labour in the economic sense.
B. Labour
•Labour involves various types of human efforts that require physical
exertion, skill, and intellect, aimed at producing goods or services.
•Economic significance is attached to labour when it is performed with
the motive of receiving economic rewards.
•Work done out of love or affection, despite its contribution to human
well-being, is not considered labour in the economic sense.
Topic :- Characterstics of Labour
Characterstics
(a)Labour is perishable: A labourer cannot store his labour.
(b)Labour is an active factor: Without the active participation of labour,
land and capital may not produce anything.
(c)Labour is inseparable from the labourer
(d)Labour power differs from labourer to labourer
(e)All labour may not be productive: (i.e.) all efforts are not sure to produce
resources.
Characterstics
(a)Labour is perishable: A labourer cannot store his labour.
(b)Labour is an active factor: Without the active participation of labour,
land and capital may not produce anything.
(c)Labour is inseparable from the labourer
(d)Labour power differs from labourer to labourer
(e)All labour may not be productive: (i.e.) all efforts are not sure to produce
resources.
Topic :- Characterstics of Labour
(f) Labour has poor bargaining power: Since labour cannot be stored, the
labourer is compelled to work at the wages offered by the employers.
(g) Labour is mobile
(h) There is no rapid adjustment of supply of labour to the demand for it
(i) Choice between hours of labour and hours of leisure: The supply of
labour and wage rate is directly related. It implies that, as the wage rate
increases the labourer tends to increase the supply of labour by
reducing the hours of leisure. However, beyond a desired level of
income, the labourer reduces the supply of labour and increases the
hours.
(f) Labour has poor bargaining power: Since labour cannot be stored, the
labourer is compelled to work at the wages offered by the employers.
(g) Labour is mobile
(h) There is no rapid adjustment of supply of labour to the demand for it
(i) Choice between hours of labour and hours of leisure: The supply of
labour and wage rate is directly related. It implies that, as the wage rate
increases the labourer tends to increase the supply of labour by
reducing the hours of leisure. However, beyond a desired level of
income, the labourer reduces the supply of labour and increases the
hours.
Topic :- Capital
C. Capital
•Capital is a part of the wealth of individuals or communities that is used for the
purpose of producing more wealth.
•Capital is a stock concept
•Capital should be distinguished from general wealth, as only a portion of wealth
can be classified as capital.
•Capital is defined as the "produced means of production" or "man-made
instruments of production."
C. Capital
•Capital is a part of the wealth of individuals or communities that is used for the
purpose of producing more wealth.
•Capital is a stock concept
•Capital should be distinguished from general wealth, as only a portion of wealth
can be classified as capital.
•Capital is defined as the "produced means of production" or "man-made
instruments of production."
Topic :- Capital
•Capital is distinct from land and labour, as land and labour are primary factors
of production, while capital is a produced factor.
•Examples of capital include machine tools, factories, dams, canals, and transport
equipment.
•Capital is created by human effort in collaboration with nature to aid in the
production of goods and services.
•Capital is mobile.
•capital is perishable. Capital assets are subject to wear and tear, obsolescence,
and depreciation over time
•Capital is distinct from land and labour, as land and labour are primary factors
of production, while capital is a produced factor.
•Examples of capital include machine tools, factories, dams, canals, and transport
equipment.
•Capital is created by human effort in collaboration with nature to aid in the
production of goods and services.
•Capital is mobile.
•capital is perishable. Capital assets are subject to wear and tear, obsolescence,
and depreciation over time
Topic :- Types Of Capital
Types of Capital:
(a) Fixed capital is that which exists in a durable shape and renders a series
of services over a period of time. For example tools, machines, etc.
(b) Circulating capital is another form of capital which performs its function
in production in a single use and is not available for further use. For
example, seeds, fuel, raw materials, etc.
(c) Real capital refers to physical goods such as building, plant, machines,
etc.
Types of Capital:
(a) Fixed capital is that which exists in a durable shape and renders a series
of services over a period of time. For example tools, machines, etc.
(b) Circulating capital is another form of capital which performs its function
in production in a single use and is not available for further use. For
example, seeds, fuel, raw materials, etc.
(c) Real capital refers to physical goods such as building, plant, machines,
etc.
Topic :- Types Of Capital
(d) Human capital refers to human skill and ability. This is called human
capital because a good deal of investment goes into creation of these
abilities in humans.
(e) Tangible capital can be perceived by senses whereas intangible capital is
in the form of certain rights and benefits which cannot be perceived by
senses. For example, copyrights, goodwill, patent rights, etc.
(f) Individual capital is personal property owned by an individual or a
group of individuals.
(g) Social Capital is what belongs to the society as a whole in the form of
roads, bridges, etc.
(d) Human capital refers to human skill and ability. This is called human
capital because a good deal of investment goes into creation of these
abilities in humans.
(e) Tangible capital can be perceived by senses whereas intangible capital is
in the form of certain rights and benefits which cannot be perceived by
senses. For example, copyrights, goodwill, patent rights, etc.
(f) Individual capital is personal property owned by an individual or a
group of individuals.
(g) Social Capital is what belongs to the society as a whole in the form of
roads, bridges, etc.
Topic :- Capital Formation
Capital Formation
•Capital formation refers to the process of increasing the stock of real capital
in a country.
•It involves the production of capital goods such as machines, tools, factories,
transportation equipment, and electricity, which are used for further
production of goods.
•Capital formation is also known as investment.
Capital Formation
•Capital formation refers to the process of increasing the stock of real capital
in a country.
•It involves the production of capital goods such as machines, tools, factories,
transportation equipment, and electricity, which are used for further
production of goods.
•Capital formation is also known as investment.
Topic :- Capital Formation
•It is necessary for not only replacing and renovating existing capital goods
but also for creating additional productive capacity.
•It is advisable to reduce some present consumption and allocate a portion
of it to the production of capital goods.
•A higher rate of capital formation leads to increased production,
productive capacity, efficiency of production efforts, economic growth, and
employment opportunities.
•It is necessary for not only replacing and renovating existing capital goods
but also for creating additional productive capacity.
•It is advisable to reduce some present consumption and allocate a portion
of it to the production of capital goods.
•A higher rate of capital formation leads to increased production,
productive capacity, efficiency of production efforts, economic growth, and
employment opportunities.
Topic :- Stages of capital formation
There are mainly three stages of capital formation which are as follows:
(a) Savings
•Savings play a crucial role in capital formation, as the ability to save is
essential for individuals and the economy as a whole to accumulate
capital.
•Governments can encourage savings through policies such as making
insurance and provident funds compulsory for employed individuals
and offering tax deductions on saved income.
There are mainly three stages of capital formation which are as follows:
(a) Savings
•Savings play a crucial role in capital formation, as the ability to save is
essential for individuals and the economy as a whole to accumulate
capital.
•Governments can encourage savings through policies such as making
insurance and provident funds compulsory for employed individuals
and offering tax deductions on saved income.
Topic :- Stages of capital formation
(b) Mobilization of Savings
•Mobilization of savings is crucial for capital formation, and it involves
ensuring that saved money enters circulation and contributes to the
process of capital formation.
•The availability of appropriate financial products and institutions is
necessary for the mobilization of savings. This includes a wide
network of banks and financial institutions that can collect public
savings and direct them to potential investors.
(b) Mobilization of Savings
•Mobilization of savings is crucial for capital formation, and it involves
ensuring that saved money enters circulation and contributes to the
process of capital formation.
•The availability of appropriate financial products and institutions is
necessary for the mobilization of savings. This includes a wide
network of banks and financial institutions that can collect public
savings and direct them to potential investors.
Topic :- Stages of capital formation
(c) Investment:
•Capital formation is completed when real savings are transformed
into real capital assets.
•To achieve this, an economy needs an entrepreneurial class that is
willing to take risks in business and invest savings in productive
ventures.
•This process involves identifying and investing in productive avenues
that contribute to the expansion of the economy's capital stock.
(c) Investment:
•Capital formation is completed when real savings are transformed
into real capital assets.
•To achieve this, an economy needs an entrepreneurial class that is
willing to take risks in business and invest savings in productive
ventures.
•This process involves identifying and investing in productive avenues
that contribute to the expansion of the economy's capital stock.
Topic :- Entrepreneur
(d) Entrepreneur
•The entrepreneur mobilizes the other factors, combines them in the
right proportions, and initiates the production process.
•The entrepreneur is responsible for bearing the risks associated with
the production process.
•The entrepreneur's primary role is to initiate production and take on
the risks involved.
(d) Entrepreneur
•The entrepreneur mobilizes the other factors, combines them in the
right proportions, and initiates the production process.
•The entrepreneur is responsible for bearing the risks associated with
the production process.
•The entrepreneur's primary role is to initiate production and take on
the risks involved.
Topic :- Functions of an entrepreneur
(a) Initiating business enterprise and resource co-ordination:
•An entrepreneur plays a crucial role in business by identifying
opportunities, conceiving project ideas, and initiating a business
enterprise.
•The entrepreneur hires and pays other factors of production, such as
labor and capital, at predetermined rates.
•While other factors of production receive their contractual payments
regardless of profitability, the entrepreneur's profit is contingent on
the success of the enterprise.
(a) Initiating business enterprise and resource co-ordination:
•An entrepreneur plays a crucial role in business by identifying
opportunities, conceiving project ideas, and initiating a business
enterprise.
•The entrepreneur hires and pays other factors of production, such as
labor and capital, at predetermined rates.
•While other factors of production receive their contractual payments
regardless of profitability, the entrepreneur's profit is contingent on
the success of the enterprise.
Topic :- Functions of an entrepreneur
(b) Risk bearing or uncertainty bearing:
•The entrepreneur bears financial risks associated with unforeseen
changes in cost and demand conditions, which may result in losses.
•Technological risks also arise as new inventions and improvements
make existing techniques and machines obsolete, and the
entrepreneur must assess and bear these risks.
•As per Frank Knight, Profit is considered the reward for bearing
uncertainties that cannot be insured against, such as changes in
tastes and emergence of competition.
•While other functions of an entrepreneur can be delegated to
managers, risk bearing cannot be delegated.
(b) Risk bearing or uncertainty bearing:
•The entrepreneur bears financial risks associated with unforeseen
changes in cost and demand conditions, which may result in losses.
•Technological risks also arise as new inventions and improvements
make existing techniques and machines obsolete, and the
entrepreneur must assess and bear these risks.
•As per Frank Knight, Profit is considered the reward for bearing
uncertainties that cannot be insured against, such as changes in
tastes and emergence of competition.
•While other functions of an entrepreneur can be delegated to
managers, risk bearing cannot be delegated.
Topic :- Functions of an entrepreneur
(c) Innovations:
•According to Schumpeter, the true function of an entrepreneur is to introduce
innovations to better fulfill business requirements.
•The entrepreneur's task is to continuously introduce new innovations, which
can enhance efficiency, competitiveness, and profitability.
•Successful innovations may initially yield profits, but as they are imitated by
others, the profits tend to disappear over time.
•The supply of entrepreneurs and the rate of technological progress are
positively correlated, meaning that a higher level of innovating ability leads to
a greater number of entrepreneurs and faster technological advancement.
(c) Innovations:
•According to Schumpeter, the true function of an entrepreneur is to introduce
innovations to better fulfill business requirements.
•The entrepreneur's task is to continuously introduce new innovations, which
can enhance efficiency, competitiveness, and profitability.
•Successful innovations may initially yield profits, but as they are imitated by
others, the profits tend to disappear over time.
•The supply of entrepreneurs and the rate of technological progress are
positively correlated, meaning that a higher level of innovating ability leads to
a greater number of entrepreneurs and faster technological advancement.
Topic :- Enterprise’s objectives and constraints
The objectives of an enterprise may be broadly categorised under the
following heads:
1. Organic objectives:
•The basic objective of all enterprises is to survive, which means being
able to produce and distribute products or services at a price that
covers costs.
•Once an enterprise ensures its survival, it aims for growth and
expansion.
The objectives of an enterprise may be broadly categorised under the
following heads:
1. Organic objectives:
•The basic objective of all enterprises is to survive, which means being
able to produce and distribute products or services at a price that
covers costs.
•Once an enterprise ensures its survival, it aims for growth and
expansion.
Topic :- Enterprise’s objectives and constraints
2. Economic objectives:
•The profit maximization assumption has been a fundamental concept
in microeconomic theory.
•Under the profit maximization assumption, firms aim to determine the
price and output policies that maximize profits within the constraints
imposed by technology, finance, and other factors.
•Normal profit represents the minimum necessary for a business to
continue and includes a normal rate of return on capital, labor
remuneration, and the reward for risk-bearing by the entrepreneur.
2. Economic objectives:
•The profit maximization assumption has been a fundamental concept
in microeconomic theory.
•Under the profit maximization assumption, firms aim to determine the
price and output policies that maximize profits within the constraints
imposed by technology, finance, and other factors.
•Normal profit represents the minimum necessary for a business to
continue and includes a normal rate of return on capital, labor
remuneration, and the reward for risk-bearing by the entrepreneur.
Topic :- Enterprise’s objectives and constraints
3. Social objectives:
•An enterprise exists within a society and must fulfill the needs of that
society in order to grow.
•Important social objectives of businesses include maintaining a
continuous and sufficient supply of unadulterated goods of standard
quality, avoiding profiteering and anti-social practices, creating
opportunities for gainful employment, and ensuring that the
enterprise's output does not cause pollution.
3. Social objectives:
•An enterprise exists within a society and must fulfill the needs of that
society in order to grow.
•Important social objectives of businesses include maintaining a
continuous and sufficient supply of unadulterated goods of standard
quality, avoiding profiteering and anti-social practices, creating
opportunities for gainful employment, and ensuring that the
enterprise's output does not cause pollution.
Topic :- Enterprise’s objectives and constraints
4. Human objectives:
•Important human objectives for an organization include providing fair
treatment to employees at different levels, developing their skills and
abilities, and creating a work climate that promotes personal and
professional growth.
•Employees should be given opportunities to participate in decision-
making processes that affect them.
•Making job contents interesting and challenging can enhance
employee satisfaction and productivity.
•When an enterprise fulfills its responsibilities towards its employees,
it can secure their loyalty and support.
4. Human objectives:
•Important human objectives for an organization include providing fair
treatment to employees at different levels, developing their skills and
abilities, and creating a work climate that promotes personal and
professional growth.
•Employees should be given opportunities to participate in decision-
making processes that affect them.
•Making job contents interesting and challenging can enhance
employee satisfaction and productivity.
•When an enterprise fulfills its responsibilities towards its employees,
it can secure their loyalty and support.
Topic :- Enterprise’s objectives and constraints
5. National objectives:
An enterprise should endeavour for fulfilment of national needs and
aspirations and work towards implementation of national plans and
policies. Some of the national objectives are:
•To remove inequality of opportunities and provide fair opportunity to
all to work and to progress.
•To produce according to national priorities.
•To help the country become self-reliant and avoid dependence on other
nations.
•To train young men as apprentices and thus contribute in skill
formation for economic growth and development.
5. National objectives:
An enterprise should endeavour for fulfilment of national needs and
aspirations and work towards implementation of national plans and
policies. Some of the national objectives are:
•To remove inequality of opportunities and provide fair opportunity to
all to work and to progress.
•To produce according to national priorities.
•To help the country become self-reliant and avoid dependence on other
nations.
•To train young men as apprentices and thus contribute in skill
formation for economic growth and development.
Topic :- Constraints In Achieving
Entrepreneurs Objective
1.Lack of knowledge and information:
•The enterprise operates in an uncertain environment where accurate
information may be lacking.
•Due to this lack of knowledge and information, variables that impact
the firm's performance cannot be accurately predicted, not just for
the current period but also for the future.
Entrepreneurs Objective
1.Lack of knowledge and information:
•The enterprise operates in an uncertain environment where accurate
information may be lacking.
•Due to this lack of knowledge and information, variables that impact
the firm's performance cannot be accurately predicted, not just for
the current period but also for the future.
Topic :- Constraints In Achieving
Entrepreneurs Objective
2. Infrastructural inadequacies :
•There may be infrastructural inadequacies and consequent supply
chain bottlenecks resulting in shortages and unanticipated
emergencies.
•For example, there could be frequent power cuts, irregular supply of
raw-materials or non-availability of proper transport.
•This could put limitations on the power of enterprises to maximise
profits.
Entrepreneurs Objective
2. Infrastructural inadequacies :
•There may be infrastructural inadequacies and consequent supply
chain bottlenecks resulting in shortages and unanticipated
emergencies.
•For example, there could be frequent power cuts, irregular supply of
raw-materials or non-availability of proper transport.
•This could put limitations on the power of enterprises to maximise
profits.
Topic :- Constraints In Achieving
Entrepreneurs Objective
3. Economic Conditions:
•Changes in business and economic conditions, as well as external
factors like government policies and natural calamities, can have
significant impacts on firms.
•These factors create demand fluctuations, instability in sales and
revenues, and place constraints on firms' operations.
•Unexpected changes in policies or fiscal limitations can adversely
affect profitability and growth plans.
Entrepreneurs Objective
3. Economic Conditions:
•Changes in business and economic conditions, as well as external
factors like government policies and natural calamities, can have
significant impacts on firms.
•These factors create demand fluctuations, instability in sales and
revenues, and place constraints on firms' operations.
•Unexpected changes in policies or fiscal limitations can adversely
affect profitability and growth plans.
Topic :- Constraints In Achieving
Entrepreneurs Objective
4. Events such as inflation, rising interest rates, unfavourable exchange rate
fluctuations cause increased raw material, capital and labour costs and
affect the budgets and financial plans of firms.
5. Significant constraints are also imposed by the inability of firms to find
skilled workforce at competitive wages as well as due to the recurring
need for personnel training.
Entrepreneurs Objective
4. Events such as inflation, rising interest rates, unfavourable exchange rate
fluctuations cause increased raw material, capital and labour costs and
affect the budgets and financial plans of firms.
5. Significant constraints are also imposed by the inability of firms to find
skilled workforce at competitive wages as well as due to the recurring
need for personnel training.
Topic :- Enterprise’s Problems
Some major areas of problems in the context of Business Economics are given
below —
1. Problems relating to objectives:
•An enterprise operates within a complex environment which consist
of economic, social, political, and cultural factors.
•Setting objectives in relation to this environment is crucial, but often
these objectives can be conflicting.
•For instance, the objective of maximizing profits may conflict with the
objective of increasing market share, which requires quality
improvements and price reductions.
Some major areas of problems in the context of Business Economics are given
below —
1. Problems relating to objectives:
•An enterprise operates within a complex environment which consist
of economic, social, political, and cultural factors.
•Setting objectives in relation to this environment is crucial, but often
these objectives can be conflicting.
•For instance, the objective of maximizing profits may conflict with the
objective of increasing market share, which requires quality
improvements and price reductions.
Topic :- Enterprise’s Problems
2. Problems relating to location and size of the plant:
•An enterprise must decide on the location of its plant, considering
factors such as proximity to raw material sources and the market,
labor costs, facilities, and transportation costs.
•The size of the firm is another consideration, whether it should be a
small-scale unit or a large-scale unit.
2. Problems relating to location and size of the plant:
•An enterprise must decide on the location of its plant, considering
factors such as proximity to raw material sources and the market,
labor costs, facilities, and transportation costs.
•The size of the firm is another consideration, whether it should be a
small-scale unit or a large-scale unit.
Topic :- Enterprise’s Problems
3. Problems relating to selecting and organising physical facilities:
•A firm must decide on the nature of the production process and the
type of equipment to be used.
•The choice of process and equipment depends on the chosen design
and the required volume of production and relative cost.
•Large-scale production typically involves the use of specialized and
complicated machinery and processes.
3. Problems relating to selecting and organising physical facilities:
•A firm must decide on the nature of the production process and the
type of equipment to be used.
•The choice of process and equipment depends on the chosen design
and the required volume of production and relative cost.
•Large-scale production typically involves the use of specialized and
complicated machinery and processes.
Topic :- Enterprise’s Problems
4. Problems relating to Finance:
Financial planning involves
•Determination of the amount of funds required for the physical plans
already prepared
•Determining capital structure and the appropriate time for financing
the enterprise etc.
4. Problems relating to Finance:
Financial planning involves
•Determination of the amount of funds required for the physical plans
already prepared
•Determining capital structure and the appropriate time for financing
the enterprise etc.
Topic :- Enterprise’s Problems
5. Problems relating to organisation structure:
•It needs to divide the overall work of the enterprise into major
specialized functions and establish appropriate departments for each
function.
•Efficient functioning of the enterprise relies on having clearly defined
roles and relationships within the organizational structure.
5. Problems relating to organisation structure:
•It needs to divide the overall work of the enterprise into major
specialized functions and establish appropriate departments for each
function.
•Efficient functioning of the enterprise relies on having clearly defined
roles and relationships within the organizational structure.
Topic :- Enterprise’s Problems
6. Problems relating to marketing:
•The enterprise has to discover its target market by identifying its actual and
potential customers
•Determine marketing tools it can use to produce desired responses from its
target market.
•The enterprise has to make decision regarding 4 P’s namely:
(a) Product: variety, quality, design, features, brand name, packaging, associated
services, utility etc.
(b) Promotion: Methods of communicating with consumers through personal
selling, social contacts, advertising, publicity etc.
(c) Price: Policies regarding pricing, discounts, allowance, credit terms,
concessions, etc.
(d) Place: Policy regarding coverage, outlets for sales, channels of distribution,
location and layout of stores, inventory, logistics etc
6. Problems relating to marketing:
•The enterprise has to discover its target market by identifying its actual and
potential customers
•Determine marketing tools it can use to produce desired responses from its
target market.
•The enterprise has to make decision regarding 4 P’s namely:
(a) Product: variety, quality, design, features, brand name, packaging, associated
services, utility etc.
(b) Promotion: Methods of communicating with consumers through personal
selling, social contacts, advertising, publicity etc.
(c) Price: Policies regarding pricing, discounts, allowance, credit terms,
concessions, etc.
(d) Place: Policy regarding coverage, outlets for sales, channels of distribution,
location and layout of stores, inventory, logistics etc
Topic :- Enterprise’s Problems
7. Problems relating to legal formalities:
•These formalities include assessing and paying different types of taxes
such as corporate tax, excise duty, sales tax, and custom duty.
•Maintaining proper books of accounts and other records.
•Submitting required information to relevant authorities is necessary.
7. Problems relating to legal formalities:
•These formalities include assessing and paying different types of taxes
such as corporate tax, excise duty, sales tax, and custom duty.
•Maintaining proper books of accounts and other records.
•Submitting required information to relevant authorities is necessary.
Topic :- Enterprise’s Problems
8. Problems relating to industrial relations
Key problems in industrial relations include
•Winning workers' cooperation, enforcing discipline
•Dealing with organized labour,
•Establishing a democratic environment by involving workers in
industry management.
8. Problems relating to industrial relations
Key problems in industrial relations include
•Winning workers' cooperation, enforcing discipline
•Dealing with organized labour,
•Establishing a democratic environment by involving workers in
industry management.
Innovation theory of entrepreneur is propounded by—
(a)Prof knight
(b)Schumpeter
(c)Max weber
(d)Peter Ducker
(a)Prof knight
(b)Schumpeter
(c)Max weber
(d)Peter Ducker
Real Capital Formation requires —
(a)An entrepreneurial class which is prepared to bear the risk of business
(b) Economic and industrial policies in which Investment is given initiative
(c)An inducement to invest, e.g. prospective rate of profit
(d)All of the above
(a)An entrepreneurial class which is prepared to bear the risk of business
(b) Economic and industrial policies in which Investment is given initiative
(c)An inducement to invest, e.g. prospective rate of profit
(d)All of the above
For the purpose of Capital Formation, which of the following create "Savings" in an
economy?
(a)Individuals or Households
(b)Business Enterprises
(c)Government
(d)All of the above
economy?
(a)Individuals or Households
(b)Business Enterprises
(c)Government
(d)All of the above
If a Resource is being used for generating further revenue, it will constitute —
(a)Wealth
(b)Capital
(c)Both (a) and (b)
(d)Neither (a) nor (b)
(a)Wealth
(b)Capital
(c)Both (a) and (b)
(d)Neither (a) nor (b)
As a Factor of Production, "Labour" is perishable. This means that —
(a)A day's labour lost cannot be completely recovered subsequently.
(b)Every human being is mortal and will have to leave this world some day or the other.
(c)Both (a) and (b)
(d)Neither (a) nor (b)
(a)A day's labour lost cannot be completely recovered subsequently.
(b)Every human being is mortal and will have to leave this world some day or the other.
(c)Both (a) and (b)
(d)Neither (a) nor (b)
Which of the following constitute Innovation?
(a)Opening—up new or improved markets
(b)Utilisation of new or improved source of Raw Material
(c)Introduction of a new or improved product
(d)All of the above
(a)Opening—up new or improved markets
(b)Utilisation of new or improved source of Raw Material
(c)Introduction of a new or improved product
(d)All of the above
Which of the following is a National Objective of an enterprise
(a)To remove inequality of opportunities and provide fair opportunity to all to work and
to progress
(b)To make the job contents interesting and challenging
(c)To avoid profiteering and anti—social practices
(d)To maximize profits
(a)To remove inequality of opportunities and provide fair opportunity to all to work and
to progress
(b)To make the job contents interesting and challenging
(c)To avoid profiteering and anti—social practices
(d)To maximize profits
Topic :- PRODUCTION FUNCTION
•The production function is a statement of the relationship between a
firm’s scarce resources (i.e. its inputs) and the output that results from
the use of these resources.
•it states technological relationship between inputs and output.
•The equation can be expressed as: Q = f (a, b, c, d …….n)
•Where ‘Q’ stands for the rate of output of given commodity and a, b, c,
d…….n, are the different factors (inputs) and services used per unit of
time.
•The production function is a statement of the relationship between a
firm’s scarce resources (i.e. its inputs) and the output that results from
the use of these resources.
•it states technological relationship between inputs and output.
•The equation can be expressed as: Q = f (a, b, c, d …….n)
•Where ‘Q’ stands for the rate of output of given commodity and a, b, c,
d…….n, are the different factors (inputs) and services used per unit of
time.
Topic :- PRODUCTION FUNCTION
•For the purpose of analysis, the whole array of inputs in the production
function can be reduced to two; L and K.
Restating the equation given above, we get:
Q = f (L, K).
Where, Q = Output
L = Labour
K = Capital
•For the purpose of analysis, the whole array of inputs in the production
function can be reduced to two; L and K.
Restating the equation given above, we get:
Q = f (L, K).
Where, Q = Output
L = Labour
K = Capital
Topic :- Assumptions of Production Function
There are three main assumptions:
(a) The relationship between inputs and outputs exists for a specific period
of time.
(b) There are no significant changes in the state of technology during the
given period of time.
(c) The output achieved by utilizing any combination of inputs in a specific
function is maximized.
There are three main assumptions:
(a) The relationship between inputs and outputs exists for a specific period
of time.
(b) There are no significant changes in the state of technology during the
given period of time.
(c) The output achieved by utilizing any combination of inputs in a specific
function is maximized.
Topic :- Short-Run Vs Long-
Run Production Function
•Short Run Production Function
➢A period will be considered short-run period if the amount of at least
one of the inputs used remains unchanged during that period.
➢In the short-run, the production function is studied by holding the
quantities of capital fixed, while varying the amount of other factors
(labour, raw material etc.) This is done when the law of variable
proportion is studied.
Run Production Function
•Short Run Production Function
➢A period will be considered short-run period if the amount of at least
one of the inputs used remains unchanged during that period.
➢In the short-run, the production function is studied by holding the
quantities of capital fixed, while varying the amount of other factors
(labour, raw material etc.) This is done when the law of variable
proportion is studied.
Topic :- Short-Run Vs Long-
Run Production Function
•Long Run Production Function
➢The long run is a period of time (or planning horizon) in which all
factors of production are variable.
➢It is a time period when the firm will be able to install new machines
and capital equipments apart from increasing the variable factors of
production.
➢The behaviour of production when all factors are varied is the subject
matter of the law of returns to scale.
Run Production Function
•Long Run Production Function
➢The long run is a period of time (or planning horizon) in which all
factors of production are variable.
➢It is a time period when the firm will be able to install new machines
and capital equipments apart from increasing the variable factors of
production.
➢The behaviour of production when all factors are varied is the subject
matter of the law of returns to scale.
Topic :- CONCEPT OF PRODUCT
(a) Total Product
•Total product refers to the overall quantity of goods produced by a
company within a specific time period, using a given number of inputs.
•For instance, if 10 workers produce 80 kg of wheat, the total product
would be 80 kg.
(a) Total Product
•Total product refers to the overall quantity of goods produced by a
company within a specific time period, using a given number of inputs.
•For instance, if 10 workers produce 80 kg of wheat, the total product
would be 80 kg.
Topic :- CONCEPT OF PRODUCT
(b) Average Product (AP)
•Average product refers to output per unit of variable input.
•Average Product is also known as ‘Average Physical Product (APP)’ or
‘Average Return’.
(b) Average Product (AP)
•Average product refers to output per unit of variable input.
•Average Product is also known as ‘Average Physical Product (APP)’ or
‘Average Return’.
Topic :- CONCEPT OF PRODUCT
(c) Marginal Product
•Marginal product is the change in total product, when additional unit of
variable factor is introduced or employed.
•In other words, it is the addition made to the total production by an
additional unit of input.
(c) Marginal Product
•Marginal product is the change in total product, when additional unit of
variable factor is introduced or employed.
•In other words, it is the addition made to the total production by an
additional unit of input.
Topic :- CONCEPT OF PRODUCT
The Law of Variable Proportions or the Law of Diminishing Returns
•Examines the production function with one factor variable, keeping
quantities of other factors fixed.
•It refers to input-output relationship, when the output is increased by
varying the quantity of one input.
•This law operates in the short run ‘when all factors of production cannot
be increased or decreased simultaneously
The Law of Variable Proportions or the Law of Diminishing Returns
•Examines the production function with one factor variable, keeping
quantities of other factors fixed.
•It refers to input-output relationship, when the output is increased by
varying the quantity of one input.
•This law operates in the short run ‘when all factors of production cannot
be increased or decreased simultaneously
Topic :- CONCEPT OF PRODUCT
•The law operates under certain assumptions which are as follows:
(a) The state of technology is assumed to be given and unchanged. If
there is any improvement in technology, then marginal product and
average product may rise instead of falling.
(b) It is assumed that all variable factors are equally efficient.
(c) There must be some inputs whose quantity is kept fixed.
(d) We consider only physical inputs and outputs and not economic
profitability in monetary terms.
•The law operates under certain assumptions which are as follows:
(a) The state of technology is assumed to be given and unchanged. If
there is any improvement in technology, then marginal product and
average product may rise instead of falling.
(b) It is assumed that all variable factors are equally efficient.
(c) There must be some inputs whose quantity is kept fixed.
(d) We consider only physical inputs and outputs and not economic
profitability in monetary terms.
Topic :- CONCEPT OF PRODUCT
Labour TP MP AP
1 10 10 10
2 22 12 11 Increasing Returns
3 36 14 12
4 48 12 12
5 56 8 11.2
6 62 6 10.33 Diminishing Returns
7 65 3 9.29
8 65 0 8.125
9 63 -2 7
10 58 -5 5.8 Negative Returns
Labour TP MP AP
1 10 10 10
2 22 12 11 Increasing Returns
3 36 14 12
4 48 12 12
5 56 8 11.2
6 62 6 10.33 Diminishing Returns
7 65 3 9.29
8 65 0 8.125
9 63 -2 7
10 58 -5 5.8 Negative Returns
Topic :- CONCEPT OF PRODUCT
Stage 1: The Stage of Increasing Returns:
➢In this stage, the total product increases at an increasing rate, marginal
product also rises and is maximum at the point corresponding to the
point of inflexion and average product goes on rising.
➢After Inflexion Point, the total product goes on rising but at a
diminishing rate. Marginal product falls but is positive. The stage 1 ends
where the AP curve reaches its highest point.
➢in the first stage, the AP curve rises throughout whereas the marginal
product curve first rises and then starts falling after reaching its
maximum.
Stage 1: The Stage of Increasing Returns:
➢In this stage, the total product increases at an increasing rate, marginal
product also rises and is maximum at the point corresponding to the
point of inflexion and average product goes on rising.
➢After Inflexion Point, the total product goes on rising but at a
diminishing rate. Marginal product falls but is positive. The stage 1 ends
where the AP curve reaches its highest point.
➢in the first stage, the AP curve rises throughout whereas the marginal
product curve first rises and then starts falling after reaching its
maximum.
Topic :- CONCEPT OF PRODUCT
Explanation of Stage 1
1.Enhanced Utilization of the Fixed Factor
2.Improved Efficiency of Variable Factors
3.Indivisibility of Fixed Factors
Explanation of Stage 1
1.Enhanced Utilization of the Fixed Factor
2.Improved Efficiency of Variable Factors
3.Indivisibility of Fixed Factors
Topic :- CONCEPT OF PRODUCT
Stage 2: Stage of Diminishing Returns:
➢In stage 2, the total product continues to increase at a diminishing rate
until it reaches its maximum leve.
➢In this stage, both marginal product and average product of the variable
factor are diminishing but are positive.
➢At the end of this stage the marginal product of the variable factor is
zero corresponding to maximum TP.
➢Stage 2, is known as the stage of diminishing returns because both the
average and marginal products of the variable factors continuously fall
during this stage.
➢This stage is very important because the firm will seek to produce
within its range.
Stage 2: Stage of Diminishing Returns:
➢In stage 2, the total product continues to increase at a diminishing rate
until it reaches its maximum leve.
➢In this stage, both marginal product and average product of the variable
factor are diminishing but are positive.
➢At the end of this stage the marginal product of the variable factor is
zero corresponding to maximum TP.
➢Stage 2, is known as the stage of diminishing returns because both the
average and marginal products of the variable factors continuously fall
during this stage.
➢This stage is very important because the firm will seek to produce
within its range.
Topic :- CONCEPT OF PRODUCT
Explanation of Stage 2
1.Optimal Combination of Factors.
2.fixed and variable factors are imperfect substitutes for each other
Explanation of Stage 2
1.Optimal Combination of Factors.
2.fixed and variable factors are imperfect substitutes for each other
Topic :- CONCEPT OF PRODUCT
Stage 3: Stage of Negative Returns:
➢In Stage 3, total product declines, MP is negative, average product is
diminishing.
➢This stage is called the stage of negative returns since the marginal
product of the variable factor is negative during this stage
Stage 3: Stage of Negative Returns:
➢In Stage 3, total product declines, MP is negative, average product is
diminishing.
➢This stage is called the stage of negative returns since the marginal
product of the variable factor is negative during this stage
Topic :- CONCEPT OF PRODUCT
Explanation of Stage 3
1.Constraints of Fixed Factors
2.Lack of Coordination between Fixed and Variable Factors
3.Decline in Efficiency of the Variable Factor
Explanation of Stage 3
1.Constraints of Fixed Factors
2.Lack of Coordination between Fixed and Variable Factors
3.Decline in Efficiency of the Variable Factor
Topic :- Stage of Operation
A rational producer aims to operate in Phase II of the Law of Variable Proportions for several
reasons:
1.Phase I: In this phase, the employment of each additional unit of the variable factor results
in an increasing marginal product, indicating the potential for higher profits. The producer
can benefit from increasing production by utilizing more units of the variable factor.
2.Phase III: In this phase, the marginal product becomes negative, indicating technical
inefficiency and reduced profitability
3.Hence, the rational choice for a producer is to operate in Phase II, where the TP is at its
maximum and the marginal product of each variable factor remains positive.
A rational producer aims to operate in Phase II of the Law of Variable Proportions for several
reasons:
1.Phase I: In this phase, the employment of each additional unit of the variable factor results
in an increasing marginal product, indicating the potential for higher profits. The producer
can benefit from increasing production by utilizing more units of the variable factor.
2.Phase III: In this phase, the marginal product becomes negative, indicating technical
inefficiency and reduced profitability
3.Hence, the rational choice for a producer is to operate in Phase II, where the TP is at its
maximum and the marginal product of each variable factor remains positive.
Topic :- Relationship Between AP & MP
Topic :- Relationship Between TP & MP
Average Product (AP) —
(a)Will have positive values only
(b)Will have negative values only
(c)Can be positive or zero or even negative.
(d)Can be positive or zero, but not negative.
(a)Will have positive values only
(b)Will have negative values only
(c)Can be positive or zero or even negative.
(d)Can be positive or zero, but not negative.
.At the Point of Inflexion —
(a)Total Product is maximum
(b)Average Product is maximum
(c)Marginal Product is maximum
(d)All of the above
(a)Total Product is maximum
(b)Average Product is maximum
(c)Marginal Product is maximum
(d)All of the above
At what point is the Marginal Product maximum?
(a)Turning Point
(b)Equilibrium Point
(c)Focal Point
(d)Inflexion Point
(a)Turning Point
(b)Equilibrium Point
(c)Focal Point
(d)Inflexion Point
When Average Product (AP) rises as a result of an increase in the quantity of variable
input —
(a)MP < AP
(b)MP = AP
(c)MP > AP
(d)There is no relationship between MP and AP
input —
(a)MP < AP
(b)MP = AP
(c)MP > AP
(d)There is no relationship between MP and AP
When Marginal Product (MP) = Average Product (AP), it means that AP is —
(a)At its maximum
(b)At its minimum
(c)Zero
(d)Infinity
(a)At its maximum
(b)At its minimum
(c)Zero
(d)Infinity
If the Marginal Product of Labour is below the Average Product of Labour, it must be true
that
(a)The Marginal Product of Labour is negative
(b)The Marginal Product of Labour is zero
(c)The Average Product of Labour is falling
(d)The Average Product of Labour is negative
that
(a)The Marginal Product of Labour is negative
(b)The Marginal Product of Labour is zero
(c)The Average Product of Labour is falling
(d)The Average Product of Labour is negative
TOPIC: Returns To Scale
•The law of returns to scale examines the production function i.e. the input output
relation in long run where increase in output can be achieved by varying the units of
all factors in the same proportion.
•In other words, in long run all factors of production are constant.
•In the long run the scale of production and the size of the firm can be increased.
•Returns to scale may be constant, increasing or decreasing.
•The law of returns to scale examines the production function i.e. the input output
relation in long run where increase in output can be achieved by varying the units of
all factors in the same proportion.
•In other words, in long run all factors of production are constant.
•In the long run the scale of production and the size of the firm can be increased.
•Returns to scale may be constant, increasing or decreasing.
Topic :- Cobb-Douglas Production Function
•A famous statistical production function is Cobb-Douglas production
function.
•Paul H. Douglas and C.W. Cobb of the U.S.A. studied the production
function of the American manufacturing industries.
•In its original form, this production function applies not to an individual
firm but to the whole of manufacturing in the United States.
•In this case, output is manufacturing production and inputs used are
labour and capital
•A famous statistical production function is Cobb-Douglas production
function.
•Paul H. Douglas and C.W. Cobb of the U.S.A. studied the production
function of the American manufacturing industries.
•In its original form, this production function applies not to an individual
firm but to the whole of manufacturing in the United States.
•In this case, output is manufacturing production and inputs used are
labour and capital
Topic :- Cobb-Douglas Production Function
•Cobb-Douglas production function is stated as:
Q = K L
a
C
b
•Cobb-Douglas production function is stated as:
Q = K L
a
C
b
ISO-QUANTS
•Isoquants are similar to indifference curve
•An isoquant represents all those combinations of inputs which are capable of
producing the same level of output.
•the producer is indifferent as to which combination he chooses.
•Isoquants are also called equal-product curves,or production indifference curves or
iso-product curves.
•Isoquants have properties similar to indifference curves.
•Isoquants are negatively sloped, convex to the origin non-intersecting.
•However, there is one important difference between the two: whereas in an
indifference curve it is not possible to quantify the level of satisfaction acquired by the
consumer, the level of production acquired by the producer is easily quantified.
•Isoquants are similar to indifference curve
•An isoquant represents all those combinations of inputs which are capable of
producing the same level of output.
•the producer is indifferent as to which combination he chooses.
•Isoquants are also called equal-product curves,or production indifference curves or
iso-product curves.
•Isoquants have properties similar to indifference curves.
•Isoquants are negatively sloped, convex to the origin non-intersecting.
•However, there is one important difference between the two: whereas in an
indifference curve it is not possible to quantify the level of satisfaction acquired by the
consumer, the level of production acquired by the producer is easily quantified.
Production Optimisation
Factor
Combination
Factor XFactor YMRTS
A 1 12 -
B 2 08 4
C 3 05 3
D 4 03 2
E 5 02 1
Factor
Combination
Factor XFactor YMRTS
A 1 12 -
B 2 08 4
C 3 05 3
D 4 03 2
E 5 02 1
ISO-COST or Equal Cost Line
•Iso cost line, also known as budget line or the
budget constraint line,
•shows the various alternative combinations of
two factors which the firm can buy with given
outlay.
•all points on a budget line would cost the firm
the same amount.
•Iso cost line, also known as budget line or the
budget constraint line,
•shows the various alternative combinations of
two factors which the firm can buy with given
outlay.
•all points on a budget line would cost the firm
the same amount.
Optimum Combination For Producer
•The firm has already decided about
the level of output to be produced.
Then the question is with which factor
combination the firm should try to
produce the pre-decided level of
output.
•The firm will try to use the least-cost
combination of factors.
•The least cost combination of factors
can be found by superimposing the
isoquant that represents the pre
decided level of output on the iso-
cost lines.
•The firm has already decided about
the level of output to be produced.
Then the question is with which factor
combination the firm should try to
produce the pre-decided level of
output.
•The firm will try to use the least-cost
combination of factors.
•The least cost combination of factors
can be found by superimposing the
isoquant that represents the pre
decided level of output on the iso-
cost lines.
The point of tangency between any Isoquant and an Isocost Line gives the
(a)highest—cost combination of inputs and maximum level of output that can be
produced
(b)lowest—cost combination of inputs and minimum level of output that can be
produced
(c)lowest—cost combination of inputs and maximum level of output that can be
produced
(d)highest—cost combination of inputs and minimum level of output that can be
produced
(a)highest—cost combination of inputs and maximum level of output that can be
produced
(b)lowest—cost combination of inputs and minimum level of output that can be
produced
(c)lowest—cost combination of inputs and maximum level of output that can be
produced
(d)highest—cost combination of inputs and minimum level of output that can be
produced
Which of the following statements is true?
(a)All points on a Budget Line would cost the Firm the same amount.
(b)Whatever the combination of Factor Inputs the Firm chooses, the Total Cost to the
Firm remains the same.
(c)A change in the relative Input Price will cause a change in the slope of the Isocost
Line.
(d)All the above
(a)All points on a Budget Line would cost the Firm the same amount.
(b)Whatever the combination of Factor Inputs the Firm chooses, the Total Cost to the
Firm remains the same.
(c)A change in the relative Input Price will cause a change in the slope of the Isocost
Line.
(d)All the above
Cost Concept
Cost analysis is concerned with the financial aspects of production relations
as against physical aspects which were considered in production analysis.
Topic : COST CONCEPT
Cost analysis is concerned with the financial aspects of production relations
as against physical aspects which were considered in production analysis.
Topic : COST CONCEPT
Explicit cost and Implicit cost.
• Economic Costs = Explicit Costs + Implicit Costs
Explicit cost Implicit cost
✓Costs which involve cash outflow
to factors of production
✓Costs which do not involve any
cash payment to outsiders
• Economic Costs = Explicit Costs + Implicit Costs
Explicit cost Implicit cost
✓Costs which involve cash outflow
to factors of production
✓Costs which do not involve any
cash payment to outsiders
Opportunity cost:
(a)Cost sacrifice made, or Opportunity foregone in accepting a next best
alternative
(b)Opportunity Cost arises only when alternatives are available.
(c)Opportunity Costs do not involve any cash payment as such.
(a)Cost sacrifice made, or Opportunity foregone in accepting a next best
alternative
(b)Opportunity Cost arises only when alternatives are available.
(c)Opportunity Costs do not involve any cash payment as such.
Direct cost vs Indirect Cost
Direct cost or traceable cost
•Direct costs are those which have direct relationship with a component of
operation
•They are charged directly to product
Indirect cost or non-traceable cost
•Indirect costs are those which are not easily and definitely identifiable in
relation to a plant, product, process or department.
•Apportioned on suitable basis
Direct cost or traceable cost
•Direct costs are those which have direct relationship with a component of
operation
•They are charged directly to product
Indirect cost or non-traceable cost
•Indirect costs are those which are not easily and definitely identifiable in
relation to a plant, product, process or department.
•Apportioned on suitable basis
Fixed costs and Variable costs
Basis Fixed Costs Variable Costs
Meaning Fixed Costs are costs that do
not vary with output, up to a
certain level of activity.
Variable Costs are costs that
vary, based on the level of
output.
Relation with
production
They are incurred even at zero
level of output, i.e. even before
output is produced.
They are incurred only when
production commences.
Cost per unitFixed cost per unit of output
decreases with increase in
output, and vice-versa, upto
certain level of output.
Variable Cost per unit of output
generally remains constant,
Basis Fixed Costs Variable Costs
Meaning Fixed Costs are costs that do
not vary with output, up to a
certain level of activity.
Variable Costs are costs that
vary, based on the level of
output.
Relation with
production
They are incurred even at zero
level of output, i.e. even before
output is produced.
They are incurred only when
production commences.
Cost per unitFixed cost per unit of output
decreases with increase in
output, and vice-versa, upto
certain level of output.
Variable Cost per unit of output
generally remains constant,
Committed cost and Discretionary costs
ParticularsCommitted Fixed Costs Discretionary Fixed Costs
Control These costs cannot be
controlled.
These costs can be controlled.
As they are the part of decision
making.
Also Known As"Unavoidable"Fixed Costs. "Avoidable" Fixed Costs.
ParticularsCommitted Fixed Costs Discretionary Fixed Costs
Control These costs cannot be
controlled.
These costs can be controlled.
As they are the part of decision
making.
Also Known As"Unavoidable"Fixed Costs. "Avoidable" Fixed Costs.
Type Explanation
Historical cost refers to the cost incurred in the past.
Replacement cost is the money expenditure that has to be incurred for
replacing an old asset.
Incremental cost Additional cost incurred by a firm as result of a business
decision.
Sunk Cost refer to those costs which are already incurred once and
for all and cannot be recovered.
Private cost costs actually incurred or provided for by firms and are
either explicit or implicit.
Social Cost refers to the total cost borne by the society on account of
a business activity and includes private cost and external
cost.
Historical cost refers to the cost incurred in the past.
Replacement cost is the money expenditure that has to be incurred for
replacing an old asset.
Incremental cost Additional cost incurred by a firm as result of a business
decision.
Sunk Cost refer to those costs which are already incurred once and
for all and cannot be recovered.
Private cost costs actually incurred or provided for by firms and are
either explicit or implicit.
Social Cost refers to the total cost borne by the society on account of
a business activity and includes private cost and external
cost.
Marginal Cost: Addition made to the total cost by production of an additional unit of
output.
Marginal Costs per unit =
Change in Total Cost
Change in Output
Behaviour of Marginal Cost Curve:
•The behaviour of MC Curve is the reverse of the behaviour of the Marginal Product
(MP) Curve under the Law of Variable Proportions.
•Marginal Product (MP) Curve rises first, reaches a maximum and then declines, as
seen in the Law of Variable Proportions.
•So, Marginal Cost (MC) Curve of a Firm declines first, reaches its minimum and then
rises. Hence, Marginal Cost Curve of a Firm is U—shaped.
output.
Marginal Costs per unit =
Change in Total Cost
Change in Output
Behaviour of Marginal Cost Curve:
•The behaviour of MC Curve is the reverse of the behaviour of the Marginal Product
(MP) Curve under the Law of Variable Proportions.
•Marginal Product (MP) Curve rises first, reaches a maximum and then declines, as
seen in the Law of Variable Proportions.
•So, Marginal Cost (MC) Curve of a Firm declines first, reaches its minimum and then
rises. Hence, Marginal Cost Curve of a Firm is U—shaped.
Cost Function-
1.It refers to the mathematical relationship between cost of a product and the
various determinants of cost.
2.In cost function Dependent variable is Total Cost whereas independent variable
is price of factor of production, size of output, level of capacity utilization etc
3.There are two kinds of cost functions:
a)Short run Cost Function
b)Long run Cost Function
1.It refers to the mathematical relationship between cost of a product and the
various determinants of cost.
2.In cost function Dependent variable is Total Cost whereas independent variable
is price of factor of production, size of output, level of capacity utilization etc
3.There are two kinds of cost functions:
a)Short run Cost Function
b)Long run Cost Function
Short run an cost Behaviour
Total Fixed cost (Short run) TFC is parallel to X-axis
Total Variable cost (TVC) Costs that change with changes in level of output. It has
inverse ’S’ shape and start from origin.
Total Fixed cost (Short run) TFC is parallel to X-axis
Total Variable cost (TVC) Costs that change with changes in level of output. It has
inverse ’S’ shape and start from origin.
Semi-variable There are some costs which are neither perfectly variable, nor absolutely
fixed.
Total Cost = VC + FC
fixed.
Total Cost = VC + FC
AFC
AFC = TFC / Q.
AFC Curve is negatively sloped,
AFC Curve will not touch the axis since AFC cannot be = 0.
AVC
AVC = TVC / Q
AVC Curve will fall first, for the output level upto normal capacity.
AVC Curve will reach a minimum, and then rise again.
AVC is not exactly a U-shaped curve.
AFC = TFC / Q.
AFC Curve is negatively sloped,
AFC Curve will not touch the axis since AFC cannot be = 0.
AVC
AVC = TVC / Q
AVC Curve will fall first, for the output level upto normal capacity.
AVC Curve will reach a minimum, and then rise again.
AVC is not exactly a U-shaped curve.
ATC
AC Curve will fall first, due to sharp decline in AFC.
AC Curve will reach a minimum and then rise again, due to increase in AVC.
AC is a U-shaped curve.
MC
Marginal Costs p.u. = Diff. in TC/ Diff. in Q.
MC Curve will fall first,
MC is a U-shaped curve.
MC cuts AC from below, when AC is minimum
AC Curve will fall first, due to sharp decline in AFC.
AC Curve will reach a minimum and then rise again, due to increase in AVC.
AC is a U-shaped curve.
MC
Marginal Costs p.u. = Diff. in TC/ Diff. in Q.
MC Curve will fall first,
MC is a U-shaped curve.
MC cuts AC from below, when AC is minimum
A firm produces 10 units of commodity at an average total cost of Z 200 and with a
fixed cost of Z 500. Find out component of average variable cost in total cost.
(a)300
(b)200
(c)150
(d)100
fixed cost of Z 500. Find out component of average variable cost in total cost.
(a)300
(b)200
(c)150
(d)100
The AC Curve and AVC Curve start increasing at the same output level only. This
statement is
( a ) True
( b ) False
( c ) Partially True
( d ) Nothing can be said
statement is
( a ) True
( b ) False
( c ) Partially True
( d ) Nothing can be said
A Firm's Average Total Cost is Rs. 300 at 5 units of output and 320 at 6 units of output.
The Marginal Cost of producing the 6th unit is —
( a ) 2 0
( b ) 1 2 0
( c ) 3 2 0
( d ) 4 2 0
The Marginal Cost of producing the 6th unit is —
( a ) 2 0
( b ) 1 2 0
( c ) 3 2 0
( d ) 4 2 0
A Firm has a Variable Cost of 1000 at 5 units of output. If Fixed Costs are Rs. 400, what
will be the Average Total Cost at 5 units of output?
( a ) 2 8 0
( b ) 6 0
( c ) 1 2 0
( d ) 1 , 4 0 0
will be the Average Total Cost at 5 units of output?
( a ) 2 8 0
( b ) 6 0
( c ) 1 2 0
( d ) 1 , 4 0 0
A Firm producing 7 units of output has an Average Total Cost of Rs. 150 and has to pay
Rs. 350 to its Fixed Factors of Production whether it produces or not. How much of the
Average Total Cost is made up of Variable Costs?
(a)200
(b)50
(c)300
(d)100
Rs. 350 to its Fixed Factors of Production whether it produces or not. How much of the
Average Total Cost is made up of Variable Costs?
(a)200
(b)50
(c)300
(d)100
The Average Total Cost of producing 50 units is 250 and Total Fixed Cost is 1,000. What
is the Average Fixed Cost of producing 100 units?
( a ) 10
( b ) 30
( c ) 20
( d ) 5
is the Average Fixed Cost of producing 100 units?
( a ) 10
( b ) 30
( c ) 20
( d ) 5
A Firm's Average Fixed Cost is Rs. 20 at 6 units of output. What will it be at 4 units of
output?
( a ) 6 0
( b ) 3 0
( c ) 4 0
( d ) 2 0
output?
( a ) 6 0
( b ) 3 0
( c ) 4 0
( d ) 2 0
Topic : Relationship Between MC & AC
Marginal Cost Curve cuts the Average Cost Curve —
(a)At the left to its lowest point
(b)At its lowest point
(c)At the right to its lowest point
(d)Any of the above
(a)At the left to its lowest point
(b)At its lowest point
(c)At the right to its lowest point
(d)Any of the above
The relationship between the AC and MC is that
(a)MC will always be less than the AC
(b)MC will be more than AC when MC is falling
(c)AC may be more than MC when MC is rising
(d)None of the above
(a)MC will always be less than the AC
(b)MC will be more than AC when MC is falling
(c)AC may be more than MC when MC is rising
(d)None of the above
Which of the following statements is correct?
(a)When Average Cost is rising, Marginal Cost must also be rising
(b)When Average Cost is rising, Marginal Cost must be falling
(c)When Average Cost is rising, Marginal Cost is below the Average Cost
(d)When Average Cost is falling, Marginal Cost must be rising
(a)When Average Cost is rising, Marginal Cost must also be rising
(b)When Average Cost is rising, Marginal Cost must be falling
(c)When Average Cost is rising, Marginal Cost is below the Average Cost
(d)When Average Cost is falling, Marginal Cost must be rising
If a Firm's Average Variable Cost Curve is rising, its Marginal Cost Curve must be —
(a)Constant
(b)Above the Total Cost Curve
(c)Above the Average Variable Cost Curve.
(d)All of the above.
(a)Constant
(b)Above the Total Cost Curve
(c)Above the Average Variable Cost Curve.
(d)All of the above.
Which of the following is true of the relationship between Marginal Cost and Average
Cost Functions
(a)If MC is greater than AC, then AC is falling
(b)AC Curve intersects the MC Curve at minimum MC
(c)MC Curve intersects the AC Curve at minimum AC
(d)If MC is less than AC, then AC is increasing
Cost Functions
(a)If MC is greater than AC, then AC is falling
(b)AC Curve intersects the MC Curve at minimum MC
(c)MC Curve intersects the AC Curve at minimum AC
(d)If MC is less than AC, then AC is increasing
Long run average cost curve
1.All factors of production are variable in long—run.
2.a Firm can shift from one Plant to another, which will ensure the least cost for that level of
output, in the long—run.
3.LAC Curve is called Planning Curve.
4.SAC (Short—Term Average Cost) Curves are called Plant Curves.
5.LAC Curve is derived as an envelop / tangent of all SAC Curves.
6.LAC Curve is a U—Shaped Curve, due to the operation of Law of Returns to Scale.
1.All factors of production are variable in long—run.
2.a Firm can shift from one Plant to another, which will ensure the least cost for that level of
output, in the long—run.
3.LAC Curve is called Planning Curve.
4.SAC (Short—Term Average Cost) Curves are called Plant Curves.
5.LAC Curve is derived as an envelop / tangent of all SAC Curves.
6.LAC Curve is a U—Shaped Curve, due to the operation of Law of Returns to Scale.
7.Selecting the suitable SAC Curve at different output levels:
8.Deriving LAC Curve in case of numerous / infinite SAC Curves:
a)In the diagram, the LAC Curve is drawn as a smooth curve, so as to be
tangent to each of the SAC Curves.
b)When LAC Curve is declining LAC will be tangent to the falling portions of
the SAC Curves.
c)When LAC Curve is rising LAC will be tangent to the rising portions of the
SAC Curves.
8.Deriving LAC Curve in case of numerous / infinite SAC Curves:
a)In the diagram, the LAC Curve is drawn as a smooth curve, so as to be
tangent to each of the SAC Curves.
b)When LAC Curve is declining LAC will be tangent to the falling portions of
the SAC Curves.
c)When LAC Curve is rising LAC will be tangent to the rising portions of the
SAC Curves.
Internal Economies & Diseconomies Of Scale
Use of greater degree of division of Labour and specialised machinery at higher levels
of output are generally termed as Internal Economies.
Aspect Economies Diseconomies
Technical•More specialised and efficient
Machinery/Equipments can be used
to produce a large output yields a
lower cost per unit of output.
•Introduction of a greater degree of
Division of Labour or Specialization,
leads to reduction in cost per unit
Further increase in plant size
will lead to high degree of long
run cost, because of
management, co-ordination
and control
Use of greater degree of division of Labour and specialised machinery at higher levels
of output are generally termed as Internal Economies.
Aspect Economies Diseconomies
Technical•More specialised and efficient
Machinery/Equipments can be used
to produce a large output yields a
lower cost per unit of output.
•Introduction of a greater degree of
Division of Labour or Specialization,
leads to reduction in cost per unit
Further increase in plant size
will lead to high degree of long
run cost, because of
management, co-ordination
and control
Aspect Economies Diseconomies
ManagerialSpecialized functional areas like Production,
purchasing, marketing, Finance, etc. can be
created. Each Department can also be
further sub—divided.
Thus, management efficiency and
Productivity improve significantly.
It may be difficult for Managers to
exercise control and co— ordination
among various departments
Commercial(a)Mass Production creates the need for
bulk purchase of raw materials and
components, and leads to lower prices
being paid for such bulk purchase.
(b)Selling Costs can be minimized with the
existing sales staff, lower advertising
costs per unit, etc.
1.Higher quantities of Raw
Materials may have to be
purchased at higher prices,
since there is an increasing
demand for that Raw Material.
2.Advertising Costs tend to
increase disproportionately
beyond certain levels of output.
ManagerialSpecialized functional areas like Production,
purchasing, marketing, Finance, etc. can be
created. Each Department can also be
further sub—divided.
Thus, management efficiency and
Productivity improve significantly.
It may be difficult for Managers to
exercise control and co— ordination
among various departments
Commercial(a)Mass Production creates the need for
bulk purchase of raw materials and
components, and leads to lower prices
being paid for such bulk purchase.
(b)Selling Costs can be minimized with the
existing sales staff, lower advertising
costs per unit, etc.
1.Higher quantities of Raw
Materials may have to be
purchased at higher prices,
since there is an increasing
demand for that Raw Material.
2.Advertising Costs tend to
increase disproportionately
beyond certain levels of output.
Aspect Economies Diseconomies
Risk— bearing A large Firm with diverse and
multiple production capability will be
in a better position to withstand
economic ups and downs. So, it
enjoys economies of risk bearing.
However, the Firm's Risk may
increase of diversification instead
of giving a cover to economic
disturbances, increases risk.
Financial A large Firm can
(a)Offer better security to Bankers
and obtain credit easily.
(b)Raise money at lower cost, since
investors have confidence in it
Financial Costs will rise more
proportionately after the
optimum scale of production.
This may happen because of
relatively more dependence on
external sources of finance.
Risk— bearing A large Firm with diverse and
multiple production capability will be
in a better position to withstand
economic ups and downs. So, it
enjoys economies of risk bearing.
However, the Firm's Risk may
increase of diversification instead
of giving a cover to economic
disturbances, increases risk.
Financial A large Firm can
(a)Offer better security to Bankers
and obtain credit easily.
(b)Raise money at lower cost, since
investors have confidence in it
Financial Costs will rise more
proportionately after the
optimum scale of production.
This may happen because of
relatively more dependence on
external sources of finance.
External Economies
Aspect Explanation
Cheaper Raw
Materials and
Capital
Equipment
1.Greater demand for various kinds of materials and capital equipment
required by the industry leads to exploration of new and cheaper
sources of raw material, machinery and other types of capital
equipment.
2.This makes it possible to purchase on a large scale from other
industries.
3.This reduces their cost of production and hence their prices.
TechnologicalThere is scope of discovery of new technical knowledge and the use of
improved and better machinery as per new techniques of production and
will enhance productivity of Firms in the industry and reduce their cost of
production.
Aspect Explanation
Cheaper Raw
Materials and
Capital
Equipment
1.Greater demand for various kinds of materials and capital equipment
required by the industry leads to exploration of new and cheaper
sources of raw material, machinery and other types of capital
equipment.
2.This makes it possible to purchase on a large scale from other
industries.
3.This reduces their cost of production and hence their prices.
TechnologicalThere is scope of discovery of new technical knowledge and the use of
improved and better machinery as per new techniques of production and
will enhance productivity of Firms in the industry and reduce their cost of
production.
Aspect Explanation
Development
of Skilled
Labour
1.Workers become well—accustomed to do the various productive
processes and learn from the experience obtained due to expansion of
industry.
2.A pool of trained and skilled labour is developed, which has a
favourable effect on the level of productivity and cost of the Firms in
that industry.
Growth of
ancillary
industries
1.As an industry expands, a number of ancillary industries who specialise
in production of raw materials, tools and machinery, etc. can provide
them at a lower price to the main industry.
2.Further, new Firms may come up, to process the waste products of the
industry and make some useful product out of it.
Better
transportation
and marketing
1.Transportation and marketing network develops to a great extent, and
reduce cost of production of the Firms.
2.Communication Systems may get modernised resulting in quick and
effective information flow.
Development
of Skilled
Labour
1.Workers become well—accustomed to do the various productive
processes and learn from the experience obtained due to expansion of
industry.
2.A pool of trained and skilled labour is developed, which has a
favourable effect on the level of productivity and cost of the Firms in
that industry.
Growth of
ancillary
industries
1.As an industry expands, a number of ancillary industries who specialise
in production of raw materials, tools and machinery, etc. can provide
them at a lower price to the main industry.
2.Further, new Firms may come up, to process the waste products of the
industry and make some useful product out of it.
Better
transportation
and marketing
1.Transportation and marketing network develops to a great extent, and
reduce cost of production of the Firms.
2.Communication Systems may get modernised resulting in quick and
effective information flow.
External Diseconomies
Aspect Explanation
Sacarcity of
inputs
When an industry expands, it needs for raw materials, machines, tools and
equipments also expands.
Some inputs are such which cannot be substituted.
The firms supplying these inputs comes under pressure and may supply
input at higher price, this raises cost of production.
High Factor
Prices
When an industry expands, the requirement of various factors of
production increases. This may result in pushing up the prices of such
factors of production especially when they are short in supply.
Strain on
infrastructure
Too many Firms in an industry at one place may also result in higher
transportation cost, marketing cost and high pollution control cost
Government
Restrictions
The Government may prohibit or restrict expansion of an industry at a
particular place, by way of its policies
Aspect Explanation
Sacarcity of
inputs
When an industry expands, it needs for raw materials, machines, tools and
equipments also expands.
Some inputs are such which cannot be substituted.
The firms supplying these inputs comes under pressure and may supply
input at higher price, this raises cost of production.
High Factor
Prices
When an industry expands, the requirement of various factors of
production increases. This may result in pushing up the prices of such
factors of production especially when they are short in supply.
Strain on
infrastructure
Too many Firms in an industry at one place may also result in higher
transportation cost, marketing cost and high pollution control cost
Government
Restrictions
The Government may prohibit or restrict expansion of an industry at a
particular place, by way of its policies
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