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____________________________________________________________________________________________________ Subject COMMERCE Paper No and Title 2. Managerial Economics Module No and Title 13. Theory of Production: Law of Diminishing Returns Module Tag COM_P2_M13 COMMERCE PAPER No. 2: Managerial Economics MODULE No.13 : Theory of Production: Law of Diminishing Returns ____________________________________________________________________________________________________ TABLE OF CONTENTS 1. Learning Outcomes 2. Introduction 3. Some Basic Concepts of Production Theory 4. Production Function 5. Production Function with One Variable Input 5.1. Relationship between TP , AP and MP Curves L L L 6. The Law of Variable Proportions or Diminishing Marginal Returns 6.1. Assumptions 6.2. Stages of Production 7. Summary COMMERCE PAPER No. 2: Managerial Economics MODULE No.13 : Theory of Production: Law of Diminishing Returns ____________________________________________________________________________________________________ 1. Learning Outcomes After studying this module, you would be able to Know about the Production Function. Derive the relationship between AP, MP& TP Learn about the Law of Variable Proportions. Learn about Stages of Production. COMMERCE PAPER No. 2: Managerial Economics MODULE No.13 : Theory of Production: Law of Diminishing Returns ____________________________________________________________________________________________________ 2. Introduction Today, one of the key concerns of the business managers is to achieve optimum efficiency in production or minimizing cost for a given output. In competitive market, a firm can survive only if it is able to produce goods and services at a competitive cost. Hence, business managers should make an effort to minimize the cost of production or maximize output for a given level of inputs. There are some basic questions which managers are confronted with while endeavoring to minimize the production cost. These are: 1. How does output change with the increase in quantity of inputs? 2. How can production be optimized to achieve reduction in cost? 3. How does technology helps in minimizing the cost of production? 4. How to achieve the least cost combination of inputs for a given output? The theory of production seeks to explain answer to these questions with the help of economic models that are built under hypothetical conditions. The production theory provides various tools and methods to analyze relationship between input and output which provide directions to find solutions to practical business problems. 3. Some Basic Concepts Of Production Theory Production In economics, the transformation of resources (men, material, time and so on) into a different & more useful commodity through a process is called production. In general, the production function is limited to only ‘manufacturing’ in which inputs (labour, machine, raw material, time & so on) are transformed into an output. In economics sense, there are different forms of production other than manufacturing. When a commodity is transferred from one place to another for consuming in the production process is production. For eg. When sand is transferred from the river bank to construction site by the sand dealer, this activity, too, is production. When a commodity is stored for future consumption or sale, this is also called production. It is not necessary that only physical conversion of inputs into tangible goods take place in production process. Some types of production involves conversion of an intangible input into intangible output. For e.g. both input and output are intangible in the production of medical, legal, social and consultancy services. COMMERCE PAPER No. 2: Managerial Economics MODULE No.13 : Theory of Production: Law of Diminishing Returns
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