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Unit-5 Econ

The document outlines the concepts of short run and long run in production, highlighting that the short run has fixed factors while the long run allows all inputs to be variable. It explains key production metrics such as Total Product, Average Product, and Marginal Product, and their interrelationships. Additionally, it discusses the cost of production, differentiating between explicit and implicit costs, as well as fixed and variable costs, to aid businesses in managing expenses and optimizing production efficiency.

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12 views2 pages

Unit-5 Econ

The document outlines the concepts of short run and long run in production, highlighting that the short run has fixed factors while the long run allows all inputs to be variable. It explains key production metrics such as Total Product, Average Product, and Marginal Product, and their interrelationships. Additionally, it discusses the cost of production, differentiating between explicit and implicit costs, as well as fixed and variable costs, to aid businesses in managing expenses and optimizing production efficiency.

Uploaded by

muhiyadinmahamed20
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Short Run: A period where at least one factor of production (e.g., capital) is fixed, while others (e.g.

,
labor, raw materials) are variable. Output can be increased by adjusting variable inputs.

Long Run: A period where all inputs are variable, allowing firms to change plant size or install new
equipment to increase production.

2. Key Production Concepts

1. Total Product (TP): The total quantity of goods produced using all employed resources.

2. Average Product (AP): The output per unit of a variable input, calculated as AP = TP / L, where L is
labor.

3. Marginal Product (MP): The additional output gained by adding one extra unit of a variable input,
calculated as MP = ΔTP / ΔL.

3. Relationship Between TP, AP, and MP

When MP > AP, AP increases.

When MP < AP, AP decreases.

TP increases as long as MP is positive.

MP intersects AP at its maximum point.

These concepts help businesses optimize resource allocation and production efficiency.

Short Note on Cost of Production

1. Definition of Cost of Production

The cost of production refers to the total monetary outlay required for producing goods and services. It
includes both explicit and implicit costs.

2. Types of Costs

1. Explicit and Implicit Costs

Explicit Costs: Direct payments for purchased inputs like wages, raw materials, rent, and utilities. Also
called accounting costs.
Implicit Costs: The value of self-owned resources used in production, such as the owner’s salary or rent
of a self-owned building.

2. Economic vs. Accounting Costs

Economic Cost = Explicit Costs + Implicit Costs (includes opportunity costs).

Accounting Cost considers only explicit costs (monetary expenses).

3. Fixed and Variable Costs

Fixed Costs: Do not change with output (e.g., rent, administrative salaries, machinery depreciation).

Variable Costs: Change with output level (e.g., wages, raw material costs).

Total Cost = Fixed Cost + Variable Cost

Understanding these costs helps businesses manage expenses and maximize profit.

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