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    Activity 8 - Theory of Production

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    Marc Luis Cartoneros
    The document discusses the theory of production and costs. It defines key concepts such as short run and long run production, the law of diminishing returns, and the relationship between marginal and average product. It explains that understanding production theory helps business owners determine profit-maximizing output and optimal input combinations to minimize costs. Variable costs change with output while fixed costs do not. Total costs are the minimum cost to produce a quantity of output.

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    Activity 8 - Theory of Production

    Uploaded by

    Marc Luis Cartoneros
    26 views3 pages
    The document discusses the theory of production and costs. It defines key concepts such as short run and long run production, the law of diminishing returns, and the relationship between marginal and average product. It explains that understanding production theory helps business owners determine profit-maximizing output and optimal input combinations to minimize costs. Variable costs change with output while fixed costs do not. Total costs are the minimum cost to produce a quantity of output.

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    The document discusses the theory of production and costs. It defines key concepts such as short run and long run production, the law of diminishing returns, and the relationship between marginal and average product. It explains that understanding production theory helps business owners determine profit-maximizing output and optimal input combinations to minimize costs. Variable costs change with output while fixed costs do not. Total costs are the minimum cost to produce a quantity of output.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    26 views3 pages

    Activity 8 - Theory of Production

    Uploaded by

    Marc Luis Cartoneros
    The document discusses the theory of production and costs. It defines key concepts such as short run and long run production, the law of diminishing returns, and the relationship between marginal and average product. It explains that understanding production theory helps business owners determine profit-maximizing output and optimal input combinations to minimize costs. Variable costs change with output while fixed costs do not. Total costs are the minimum cost to produce a quantity of output.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    ACTIVITY 8

    THE ORY OF
    PRODUCTION
    AND COST
    1. What is production?
    2. Explain the difference between a
    short run and long-run production
    function. Cite one example of the
    difference in a business situation.
    3. Define law of diminishing returns. 
    4.Explain the relationship between
    marginal product and average
    product.
    5. Why is it important for an owner
    of a company to understand the
    theory of production.

    1. Production is the process of combining various material inputs and


    immaterial inputs in order to make something for consumption. It is the
    act of creating an output, a good or service which has value and
    contributes to the utility of individuals.

    2. The short run production function can be understood as the time


    period over which the firm is not able to change the quantities of all
    inputs. Conversely, long run production function indicates the time
    period, over which the firm can change the quantities of all the inputs.
    Examples of these are in short run a restaurant may regard its building
    as a fixed factor over a period of at least the next year. anda firm may
    implement change by increasing (or decreasing) the scale of production
    in response to profits (or losses)

    3. The law of diminishing marginal returns states that adding an


    additional factor of production results in smaller increases in output.
    After some optimal level of capacity utilization, the addition of any larger
    amounts of a factor of production will inevitably yield decreased per-unit
    incremental returns.

    4. Marginal product focuses on the changes between production totals


    and the quantity of resources. Average product shows output at a
    specific level of input. ... The marginal product (MP) curve crosses the
    average product (AP) curve at the point where the average product
    curve is at a maximum.
    5. The theory of production helps us to determine the profit
    maximising output, which depends on marginal and average costs of
    production besides demand conditions (marginal and average
    revenues).The theory of production also explains the optimum
    combinations of factors so as to minimise the cost of production by a
    firm.

    6. DEFINE THE FOLLOWING:

    VARIABLE COSTS - are costs that change as the quantity of the good or
    service that a business produces changes. Variable costs are the sum of
    marginal costs over all units produced. They can also be considered
    normal costs. Fixed costs and variable costs make up the two
    components of total cost.

    FIXED COSTS - In accounting and economics, fixed costs, also known


    as indirect costs or overhead costs, are business expenses that are not
    dependent on the level of goods or services produced by the business.
    They tend to be recurring, such as interest or rents being paid per month.

    TOTAL COSTS - I s the minimum dollar cost of producing some quantity


    i

    of output. This is the total economic cost of production and is made up of


    variable cost.

    AVERAGE VARIABLE COST - Average variable cost is all the costs that
    vary with output, such as materials and labor.

    AVEGAGE FIXED COST - is the fixed costs of production divided by the


    quantity of output produced. Fixed costs are those costs that must be
    incurred in fixed quantity regardless of the level of output produced.

    AVERAGE TOTAL COST - also called average cost or unit cost. Average
    total costs are a key cost in the theory of the firm because they indicate
    how efficiently scarce resources are being used. Average variable costs
    are found by dividing total fixed variable costs by output.

    MARGINAL COSTS - It is the cost of producing one extra unit of output.


    It can be found by calculating the change in total cost when output is
    increased by one unit.

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