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Production function

Production function explains the relationship between inputs and outputs. It is a mathematical equation which shows the functional relationship between the inputs used to produce output. When input increases, the output also increases.

It can be expressed mathematically as:

Q=f(n, l, k, o, t)

Where

F=Functional relationship.
n = Land and natural resources.
l = Labour.
k = Capital.
o = Organisation.
t = Technology.

Note: The modern economists consider technology as also a factor of production. because technology is also a highly determining factor and influential factor for production and output.

Iso-product curve (Iso-quant or Production indifference curve)

Iso-quant refers to equal quantity or product means output. It is a graphical presentation. It is the locus of different combination which explains about two factors which produces equal output. The producer is indifferent between all combinations (The producer has no preferences for any particular combination). the factors may be substituted to produce equal output based on Marginal rate of technical substitution. This concept is very similar to Indifference curve which is related to consumer behaviour.

Iso-Product Curves Slope Downward from Left to Right.
Isoquants are Convex to the Origin.
Any Two Iso-Product Curves Never Cut Each Other.
Higher Iso-Product Curves Represent Higher Level of Output and vice versa.
Isoquants Need Not be Parallel to Each Other.
No Isoquant can Touch Either Axis or origin.
It is oval shaped.

Assumptions of Iso-product curve for better understanding (In short)

Two factors of production: only 2 factors are used to produce output.
Divisibility of factors: Factors of production can be divided into smaller units/parts.
Technology is assumed to be constant/unchanged/same.
Given 2 factors are assumed to be substituted technically (MRTS).
Efficient combination: 2 factors are combined to produce maximum output.

Law of supply

The law of supply explains the relation between the price of a commodity and the quantity of units supplied. There is a direct and positive relation between supply and price. Supply increases with the rising prices and decreases with the diminishing price when other things remain same or constant. so, We can understand the direct relationship between the price and supply.

Factors of production

The concept of factors of production is a key topic in economics. The factors which participate in the process of production are called as factors of production. They determine the total output of a country or a firm. for example, Land, Labour, Capital and Organisation. after producing output, they receive income after getting amount from supplied goods. They receive in the form of:

Land (n) - Rent.
Labour (l) - Wages.
Capital (k) - interest.
Organisation (o) - profit or surplus amount.

Iso-cost line (price line, Factor cost line, Outlay line)

The term Isocost refers to equal cost. It shows all the possible combinations of 2 factors that is labour and capital which are available to the producer with the given cost. It explains how to produce same level of output by altering the cost of inputs that is labour and capital. If a producer employ more units of labour, he has to decrease the expenditure on capital and vice versa. Generally producer employ more number of labours as they're available at cheaper cost. as a result he can produce more output with less cost of inputs. an Isocost line shift away from the origin if the total cost increases

Average cost

Average cost is the cost per unit of output. If we divide total output by number of output units produced, we get the value of average cost.

ac-tc/total output

Marginal cost

In economics the term "Marginal" refers to additional or extra. Marginal cost is the additional cost of production to produce one more unit of output. Simple, It is the addition which can be added to total units of output. mc=Δtc/Δq

Production

Production is the process of converting resources to satisfy human wants. it is the process of creating utility for a resource. It means to produce output by converting inputs in an economy.

Production includes:

Services: A transaction without involvement of goods/commodities.
Physical goods: which are produced by manufacturing.

Linear Homogeneous Production Function

The Linear Homogeneous Production Function implies that with the proportionate change in all the factors of production, the output also increases in the same proportion. Such as, if the input factors are doubled the output also gets doubled. This is also known as constant returns to a scale. Simply, If there is increase in level of input by the producer It results in increase of total output. There is direct relationship between inputs used and output produced.

Short period

Short period in economics refers to the amount of time or period where a producer cannot alter or change all factors of production to increase output. generally labour is the only factor which can be changed in short-term. This concept is highly used in law of variable proportions.

Long period

Friends, As we discussed above in short-term period concept. Long period or long-term in production is a period where a producer can easily alter or change the all factors of production (inputs) to change the level of output.

Average product

It is the individual value of product produced by each individual labour. average product is obtained by dividing total product with number of labours employed. Average product ap = tp/l

Marginal product

It is the additional product or output which is produced by employing one more unit of labour.

mp=Δtp/Δl

Fixed factor

fixed factor refers to cost or inputs which cannot be changed by producer in short period. they cannot be changed by producer even the total product diminishes to 0 or effects by the market. for example, Land, buildings, machinery, top level management, experienced workers etc..

Variable factors

It refers to inputs/cost/factors which can be changed by the producer to change the level of output are called are variable factors. In production, all factors are variables in long-term. every factor that participate in production process can be changed in long period.

Changing scale of production

According to this concept, Output can be increased with the increase in inputs and vice versa. It is generally applicable in long period.

Internal economies

It is the benefit to the company. Expanding output by increasing more inputs is called as internal economies. They happen by increasing output.

Administrative or Managerial Economies: Division of labour.
Technical Economies: Benefits from specialised experts and installation of less cost and machine (Capital intensive).
Marketing Economies or Commercial Economies: Purchases of raw material in cheaper way and more sales in quantity.
Financial Economies: Credit at cheaper rates, Easy to raise funds etc.
Indivisibility: Proper utilisation of factors of production.
Risk baring economies: Large number of investors and risk takers.
Economies of welfare: Well-being of individuals.

External economies

It is the benefit to outside of the company. It really enhances the productivity and efficiency of operations in a firm. It refers to a resource where it can be used by many branches within a firm is called as external economies. It is possible with the expansion of the industry but not by inputs. These benefits are not based on total output produced by the industry but, by expansion of the industry.

Economies of concentration: benefit of infrastructural facilities, banking, transportation, reduces operational cost.
Economies of specialisation: 1. Vertical Disintegration = Division of work among different firms in an industry. 2. Horizontal Disintegration = production, innovation and diversification.
Cheaper raw materials and Capital Equipment: efficiency in production and low cost of production.
Technological Economies.
Availability of Skilled Labour: expansion of training centres and skilled labours, Reduces cost of production.

Supply

It refers to the commodities which are offered to sale in the market at a given price in a particular time is called as supply. It is the mount of goods where a producer is willing to sale out of total products. Producers always willing to sell the goods when the price is high. he generally decreases supply when there is less price for the goods.

Supply function

It is a mathematical equation which shows the functional relationship between supply of a commodity and its determinants. This can be written as:

sx = f(px,pI,p(r,w,Tgp,o)

sx = supply of x commodity.
f = Functional relationship.
pi = Prices of inputs.
Pr= prices of related goods
w = weather conditions
T = technology
gp = government policies.

Opportunity cost

Opportunity cost of a factor is the benefit that is forgone from the next best alternative use. It is called as alternative cost.

Example: the opportunity cost of a economic book is purchasing of a cinema tickets that is

forgone. Simple, If one can choose a best alternative out of 2 or more factors, Loss of other best alternative factor is called as opportunity cost. I love Coffee Co chocolate and Mango too. If I choose coffee chocolate, The opportunity cost is Mango chocolate. Because mango chocolate lost its use because of my alternative selection.

Fixed cost

It refers to the cost of production which is stable and unchanged even with the changes in the total output. for example, buildings, machinery etc.

Variable cost

It refers to cost of production which can be changed with the changes in the output is called as variable cost. All costs are variable in the long period such as, Regular expenses, wages, long-term payments etc.

Revenue or total revenue

Total revenue = price multiplied by quantity of output. tr-p*q

Total revenue is highly depends on the price and quality of output which is supplied in the market for sales.

Average revenue

It is the revenue per unit of output. to get average revenue, we have to divide the total revenue with total output produced in the market. ar=tr/q

Marginal revenue

Marginal revenue is the additional revenue which is gained by selling one more unit of output in the market. mr=Δtr/Δq

Total cost

Total cost is the combination of variable cost and fixed cost. It is the overall expenditure on all capital, assets, expenses, transactions. Total cost = variable cost + fixed cost.

Diseconomies of scale

A company faces diseconomies of scale when It continuously expands in a way that the cost per unit of production increases highly. It is the 3rd stage of Law of variable proportions where, the inputs are increased highly and reduces the capacity of produce. As a result average product and marginal product diminishes.

However, It is a disadvantage to the company. it includes:

organizational and managerial problems
supervisory problems
delays in decision making
lack of coordination among different units
labour problems
industrial unrest
Environmental degrodation
inadequate infrastructure

Note: Above topic is written to understand more about cost, production, firm, economies of scale.