Production and Costs

About this unit

This unit looks at the producer. It explains how inputs are turned into output through a production function, how output responds when one input is varied or when all inputs change together, and how this shapes a firm's costs. It then introduces revenue and brings costs and revenue together to find the output at which a firm earns maximum profit. These ideas are the base for understanding supply and competitive markets.

Key ideas

• Short run has at least one fixed factor; in the long run all factors are variable.
• Total, average and marginal product, and the law of variable proportions.
• Returns to scale: increasing, constant and decreasing.
• Fixed and variable costs; AFC, AVC, AC and MC curves.
• Total, average and marginal revenue under different market conditions.
• Producer's equilibrium: MR = MC with MC rising.

How to prepare

Memorise the relations between average and marginal curves (marginal pulls the average up or down, and cuts it at its turning point). Practise filling cost and revenue tables quickly, since many questions give one column and ask for another. Draw the U-shaped cost curves and the MR = MC diagram until you can label them without help.