Production and Costs — Class 12 Economics

A firm transforms inputs into output, and the production function gives the maximum output obtainable from given quantities of inputs such as labour (L) and capital (K), written . In the short run at least one factor is fixed; in the long run all factors can be varied. Three product concepts measure the contribution of a variable input: total product (TP), average product , and marginal product . The law of variable proportions states that as a variable factor is added to fixed factors, marginal product first rises and then falls; both AP and MP curves are inverse-U shaped, and MP cuts AP from above at AP’s maximum. When all inputs change together we examine returns to scale — increasing, constant or decreasing. On the cost side, total cost is the sum of total fixed cost and total variable cost, . Per-unit costs are average fixed cost, average variable cost and short-run average cost , while marginal cost . AFC falls continuously, SMC, AVC and SAC are U-shaped, and SMC cuts both AVC and SAC from below at their minimum points. In the long run there are no fixed costs and the LRAC and LRMC curves are also U-shaped.