Lecture on Production and Cost of Production.Doc

Lecture on Production and Cost of Production
Basic Economics

Production is the transformation of inputs into outputs.

Production Function shows the relationship between quantities of various inputs that can be produced with those inputs per unit of time expressed in a table, graph or an equation.

Q = f (K ,L) given a technology Where: K = Capital and L = Labor

Periods of Production 1. Short – run – the use of at the least one factor of production cannot be changed, or there are fixed inputs (combination of fixed inputs and variable inputs) 2. Long – run – all inputs can be changed (all inputs are variable inputs).

|Fixed Input |Variable Input |Total Product |Average Product|Marginal |
|(FI) |(VI) |(TP) |(AP) |Product (MP) |
| | | |(TP/VI) |(∆TP/∆ VI) |
|10 |0 |0 | | |
|10 |1 |2 | | |
|10 |2 |6 | | |
|10 |3 |12 | | |
|10 |4 |19 | | |
|10 |5 |25 | | |
|10 |6 |29 | | |
|10 |7 |31 | | |
|10 |8 |31 | | |
|10 |9 |29 | | |
|10 |10 |25 | | |

Suppose: Fixed Input – P5 per unit Variable Input – P2 per unit

Cost of Production:

Types of Costs 1. Implicit Cost – opportunity costs of using its self-owned,