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Home » Economics Homework Help » Microeconomics Help » Production and Cost
Production and Cost
In this particular aspect of microeconomics we shall be discussing about production and the supply side of the pricing of products. The supply of a product as we shall see in a later chapter depends upon it cost of production which in turn depends upon (a) the physical relationship between inputs and output and (b) the price of inputs. The physical relationship between inputs and output plays an important part in determining the cost of producing. It is the general description of this physical relation between inputs and output which forms the subject –matter of the theory of production. In other words the theory or production relates to the physical laws governing production of goods.

The act of production involves the transformation of inputs into output. The words production in economics is not merely confined to bringing about physical transformation in the matter it is creation or addition of value. Therefore production in economics also covers rendering of services such as transporting finking marketing. Laws of production or in other words the generalization on regarding relations between inputs and output developed in this chapter will apply to all these types of production.

The relation between inputs and output of a firm has been called the production function thus the theory of production is the study of production functions. The production function of a firm can be studied by hooding the quantities of some factors fixed, while varying the amount of other factors. This is done when the law of variable proportions is derived. The production function of a fir can also be studied by varying the amounts of all factors. The behaviour of production when all facets are varied is the subject matter of the laws of returns to scale. Thus in the theory of production the study of (a) the law of variable proportions and (b) the laws of returns to scale is included. Decides this the theory of production is also concerned with explaining which combination of inputs (or factors of production) a firm will chooses as to minimiseits costs of production of producing a given level of output or to maximize output for a given level of cost.

Further, we shall examine here how the cost of production of a firm changes with the change in its output. In other words, cost-output relations form the subject matter of the present aspect. The relation between cost and output is called “cost function”. The cost function of the firm depends upon the production conditions and the prices of the factors used for production. How much cost a firm will incur on production depends on the level of output. Moreover, the quantity of a product that will be offered by the firm for supply in the market depends to a great degree upon the cost of production incurred on the various possible levels of output.

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