Producer Theory- Short Run

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Economics for Management Studies
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SHORT-RUN PRODUCTION The Production Function Q=f(L,K) Q = flow of output, L = flow of labour services, K = flow of capital services, changes in technology = changes in f Profit-Maximizing Output = TR-TC TR = total revenue, TC = total cost Total, Average, and Marginal Products Total Product (TP or q): total amount produced by a firm during same time period Average Product (AP): AP= TP/L Marginal Product (MP): MP=dTP/dL Law of diminishing returns: if increasing quantities of a variable factor are applied to a given quantity of fixed factors, the variable factor’s marginal product will eventually decrease Where AP reaches its maximum, MP= AP The average curve slopes upward as long as the marginal curve is above it. For example, if MP> AP, AP is rising, If MP< AP, AP is falling. Short-Run Costs Total Cost (TC): TFC+TVC Total Fixed Cost (TFC): all costs of production that do not vary with level of output Total Variable Cost (TVC): total costs of production that vary directly with level of output Average Total Cost (ATC): ATC=TC/Q or ATC=AFC+AVC Average Fixed Cost (AFC): TFC/Q Average Variable Cost (AVC): TVC/Q Marginal Cost (MC): MC=dTC/dQ (MC=firm's supply curve) AVC and MC curves are both U-shaped because: Eventually diminishing AP of the variable factor implies eventually increasing AVC. Eventually diminishing MP of the variable factor implies eventually increasing MC. ATC curve is U-shaped because it only begins to rise when the effect of the increasing AVC do
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