Producer Behaviour and Supply

UNIT 3 (18 MARKS) PRODUCER BEHAVIOUR AND SUPPLY

PRODUCTION FUNCTION AND RETURNS TO A FACTOR Q1. What is a production function? 1 Ans. Production function is the relationship between physical input and physical output.

Q2. Define total product? 1 Ans. It is sum total of output produced by all units of labour. TP=AP*L Q3. Define marginal product? 1 Ans. Marginal product is the change in total product as a result of a unit change in the input of a variable factor. MPorMPP=TPn -TPn-1 Q4.what is meant by average product ? 1 Ans. It is production divided by units of the variable factor. AP=TP/L Q5. What are the fixed factors of production? 1 Ans. Fixed factors of production are those factors of production the application of which does not change with the change in output.

Q6. What are the variable factors of production? 1 Ans. Variable factors of production are those factors of production the applications of which changes with the change in output.

Q7. Explain the relationship between marginal product and total product? 3 Ans. (i) when MP increases, TP increases at increasing rate. (ii) When MP constant, TP increases at constant rate. (iii) when MP decreases, TP increases at diminishing rate. Q8. Complete the following table: 3

Units of labour TP AP MP 1 40 2 80 3 110 4 130 5 140 6 140 7 130

Ans. Units of labour TP AP=TP/units MP=TPn- of labour TPn-1 1 40 40 40 2 80 40 40 3 110 36.66 30 4 130 32.5 20 5 140 28 10 6 140 23.33 0 7 130 18.57 -10 Q9. Identify different stages of production and state the related law? 4 Units of labour: 1 2 3 4 5 6 7 8 Units of output: 2 6 12 16 18 18 14 8 Ans. Units of labour Units of output MP stages 1 2 2 phase/stage I : increasing returns 2 6 4 3 12 6 4 16 4 phase/stage II : diminishing returns 5 18 2 6 18 0 7 14 -4 phase/stage III : negative returns 8 8 -6 Q10. What are the causes of increasing returns to a factor? 3 ANS. Causes of increasing returns to a factor : 1. Fuller utilization of the fixed factor : in the initial Stages fixed factor remains under utilized. Its fuller utilization cause for greater application of the variable factor. Hence initially additional units of the variable factor add more & more to total output . 2. Increased efficiency of the variable factor : Additional Application of the variable factor causes process based division of labour That raises efficiency of the factor. Accordingly MP of the factor tends to Rise. Q11. What are the causes of decreasing returns to a factor? 3 Causes of decreasing return to a factor : Fixity of the factor: as more & more units the variable factor continue to be combined with the fixed factor , the latter gets over utilized. Hence the diminishing returns. 2. Imperfect factor substitutability: factors of production are imperfect substitutes of each other. more & more of labour cannot be continuously used in place of additional capital.

Q12. What is the law of variable proportion? 6 Explain with the help of TP, MP & AP Schedule & curves. Ans. Law of variable proportion: it states that as more and more of the variable factor is Combined with the fixed factor a stage will come when MP of variable factor starts declining.

SCHEDULE Land labour TP AP MP 1 2 2 2 2 1 2 5 2.5 3 Increasing returns to 1 3 9 3 4 a factor 1 4 12 3 3 1 5 14 2.8 2 Decreasing returns to 1 6 15 2.5 1 a factor 1 7 15 2.1 0 1 8 14 1.7 -1 Negative returns

TP Total K products

o L S X Increasing returns Diminishing returns y E

Marginal products X

o L S -ve MP

UNITS OF THE VARIABLE FACTOR FORMULAS 1. TP = AP*Q &

2. MP = TPn – TPn -1 3. AP = TP/ HOTS Q1. Define short run and long run. How is production function specified for the two periods? Q2. What is the relevance of stages or phases of production? Q3. Why is TP (total product) maximum when marginal product (MP) is zero?

CONCEPTS OF REVENUE Q1. What is meant by revenue? 1 Ans. Revenue refers to money receipts of a firm from the sale of its output.

Q2. Define total revenue? 1 Ans. Total revenue is the sum total of revenue derived from the sale of all units of the commodity. TR=∑ MR Q3. What is meant by average revenue? 1 Ans. Average revenue is the revenue per unit of output sold. AR=TR/Q Q4. Define marginal revenue? 1 Ans. Marginal revenue is the change in total revenue as a result of selling one more unit of output. MRn=TRn-TRn-1 Q5. Which concept of revenue is called price? 1 Ans. Average revenue is called price.

Q6. What changes should take place in total revenue so that (i) marginal revenue is positive and constant, and (ii) marginal revenue is falling? 3 Ans. (i) when MR is positive and constant, TR should increase at a constant rate (ii) When MR is falling, TR should increase at a decreasing rate.

Q7. What change will take place in marginal revenue when: 3 (i) Total revenue increase at increasing rate? (ii) Total revenue increases at a diminishing rate? Ans. (i) when total revenue increases at an increases rate, marginal revenue should be increasing. (ii) When total revenue increases at a diminishing rate, marginal revenue should be diminishing.

Q8. What change in total revenue will result in: 3 (i) a decrease in marginal revenue, and (ii) An increase in marginal revenue? Ans. (i) with a decrease in marginal revenue, total revenue should increase at diminishing rate. (ii) With an increase in marginal revenue, total revenue should increase at increasing rate.

Q9. Explain the relationship betweet TR, MR & AR with the help of data & diagram? 6

ANS. SCHEDULE Output price TR MR AR 1 10 10 10 10 2 9 18 8 9 3 8 24 6 8 4 7 28 4 7 5 6 30 2 6 6 5 30 0 5 7 4 28 -2 4

Relationship between TR & MR 1. When TR is increasing at constant rate MR should be constant. 2. When TR is increases at decreasing rate MR should be decreasing. 3. When TR is decreasing MR is negative. 4. When TR is maximum MR is zero. Relationship between MR & AR 1. When AR is downward sloping, MR curve should be below AR curve. 2. If AR is constant MR is equal to AR. Y

TR X Y OUTPUT MR & AR

AR 0 X MR OUTPUT

Q10. What are revenue curves under perfect competition, monopoly & monopolistic competition, explain with the help of Schedule? 6

Ans. 1. Schedule under perfect competition:

OUTPUT AR =P TR MR 1 5 5 5 2 5 10 5 3 5 15 5 4 5 20 5 FORMULAS

 TR = AR * Q & TR= Total Revenue

 MR = TRn- TRn-1 MR= Marginal Revenue  AR = TR / Q AR = Average Revenue

Revenue curves under perfect competition Y

P= AR=MR REVENUE(RS) PP

0 X OUTPUT 2 . Revenue curves under monopoly: Schedule

Output TR (AR*Q) AR (TR/Q) MR( TRn-TRn-1) 1 10 10 10 2 18 9 8 3 24 8 6 4 28 7 4

REVENUE (RS)

MR 0 x OUTPUT 3. Revenue curves under monopolistic: Schedule

Output AR( TR/Q) TR(AR*Q) MR(TRn-TRn-1 )_ 1 10 10 10 2 9.5 19 3 9 27 8 4 8.5 34 7 y

Revenue(Rs) AR MR 0 X Output

Q4: Complete the following table: 4 Output Total Marginal Average (units) revenue(Rs.) Revenue(Rs.) Revenue(Rs.) 1 14 _ _ 2 24 _ _ 3 24 _ _ 4 16 _ _

Ans. Output(units) Total Marginal Average Revenue(Rs.) Revenue(Rs.) revenue(Rs.) 1 14 14 14 2 24 10 12 3 24 0 8 4 16 -8 4

Q5.Complete the following table: 4 Price(Rs.) Output(units) Total Marginal Revenue(Rs.) Revenue(Rs.) 7 _ 7 _ _ 2 10 _ _ 3 _ -1 1 _ _ -5

Ans. Price(Rs.) Output(units) Total Marginal Revenue(Rs.) Revenue(Rs.) 7 1 7 7 5 2 10 3 3 3 9 -1 1 4 4 -5

HOTS Q1. Show that AR= price? Q2. What is firms demand curve? Q3. What is firm’s price line? What is its shape? Q4. Why MR

CONCEPT OF COST Q1. What is meant by cost of production? 1 Ans. Cost is the expenditure incurred by the producer on purchases of factor input such as land, labour, capital, etc., and non-non factor inputs such as raw material,fuel,etc.

Q2. What is meant by total cost? 1 Ans. Total cost refers to all expenses incurred by the producer to produce a given quantity of output. Total Cost(TC)= Total Fixed Cost (TFC)+Total Variable Cost(TVC)

Q3. What is meant by average cost? 1 Ans. Average cost is the cost per unit of output producer. AC=TC/Q Also, AC= AFC+AVC

Q4. Define marginal cost? 1 Ans. Marginal cost is the change in total cost by producing one more or less unit of output. MCn=TCn-TCn-1 Also, MC=ΔTC/ΔQ

Q5. Define fixed cost? 1 Ans. Fixed or supplementary costs are those costs which do not change with change in the level of output.

Q6. What is meant by prime and variable cost? 1 Ans. Prime and variable costs are those costs which change as the level of output changes. Q7. What is the general shape of AFC curve? 1 Ans. The shape of AFC curve is a rectangular hyperbola. Q8. Differentiate between fixed and variable cost? 3 ANS.

VARIABLE COST FIXED COST

Fixed cost is the Expenditure incurred Variable cost is the expenditure incurred by By the producer on the purchase of fixed the producer on the use of variable factor. Factor.

fixed cost do not change with the quantity of Variable cost change with change With output. quantity of output.

fixed cost remain the same whether output is variable cost is zero when output is zero. zero or maximum.

Rent, wages of permanent Staff. Cost of raw material, wages of Casual labour. Q9. Explain the relation between average cost & marginal cost with the help of diagram? 4 ANS. Y MC AC

0 Q Q1 X OUTPUT

Relation between average and marginal cost

 Both AC and MC are calculated from TC.

 When AC falls, MC is lower than AC.

 When AC rises, MC is greater then AC.

 MC cuts AC at its lowest point.

Q10. Give meanings of: 3  Explicit cost  Implicit cost

Ans. EXPLICIT COST : Explicit costs are those cash payments which firms makes to outsider for the purchase of goods and services. For e.g.: wages paid to laborers’ & price of raw materials. IMPLICIT COST : Implicit costs are opportunity cost of self-owned and self-employed resources. For e.g.: interest on entrepreneur’s own capital or rent on Entrepreneur’s own building.

Q11. A firm’s total cost schedule is given in the following table: 6 Output(units): 0 1 2 3 4 5 6 7 8 Total cost (in 40 120 170 180 210 260 340 440 550 Rs.) (1).what is the total fixed cost of this firm? (2).drive AFC,AVC,ATC and MC schedules. Ans.(1).since at zero level of output total cost is 40,this is the firm’s total fixed cost. Output TC(Rs.) TFC(Rs.) TVC(Rs.) AFC(Rs.) AVC(Rs.) ATC(Rs.) MC(Rs.) (units) 0 40 40 _ _ _ 1 120 40 80 40 80 120 80 2 170 40 130 20 65 85 50 3 180 40 140 13.33 46.67 60 10 4 210 40 170 10 42.5 52.5 30 5 260 40 220 8 44 52 50 6 340 40 300 6.67 50 56.67 80 7 440 40 400 5.71 57.14 62.85 100 8 550 40 510 5 63.75 68.75 110

Q12. From the following table , calculate average variable cost of each given level of output: Output(units) 1 2 3 4 Marginal 70 60 62 72 cost (Rs.)

4 Ans. Output(units) Marginal Total variable Average variable cost (Rs.) cost (Rs.) cost (Rs.) 1 70 70 70 2 60 130 65 3 62 192 64 4 72 264 66

Q3. Complete the following table: 4 Output(units) Total Average Marginal variable variable cost(Rs.) cost(Rs.) cost(Rs.) 1 _ 12 _ 2 20 _ _ _ _ 10 10 4 40 _ _ Ans. Output(units) Total Average variable Marginal variable cost(Rs.) cost(Rs.) cost(Rs.) 1 12 12 12 2 20 10 8 3 30 10 10 4 40 10 10

Q1. During the market period all costs are fixed costs. How?

Q2. MC can be measured both as the difference between TCn and TCn-1 as well as the

difference between TVCn and TVCn-1. How? Q3. Does TC always shoot from y-axis? Q4. What segment of MC curve serves as short period supply curve of the firm and what as long period supply curve? Q5. Why long period average cost curve is for a firm is U shaped, when in the long run a firm can combine different factors in the best possible ratio? PRODUCER`S EQUILIBRIUM

Q1. Who is a producer? 1 Ans. A producer is a producing unit who uses factor inputs to produce goods which have exchange value.

Q2. What is meant by producer’s equilibrium? 1 Ans. Producer is said to be in equilibrium when he maximizes his profits and minimizes his loses. It occurs when (i) MR=MC and MC is rising.

Q3. Explain producer’s equilibrium with the help of TR-TC approach. 3 Ans. The producer’s equilibrium refers to the situation in which he maximizes his profits. Profits = TR-TC

OUTPUT TR TC PROFIT (TR-TC) 0 0 3 -3 1 4 5 -1 2 7 6 1 3 9 7 2 producer equilibrium 4 10 9 1 5 10 12 -2 6 9 18 -9 Producer is in equilibrium at 3rd level of output.

Q4. What are the conditions of producer equilibrium under perfect competition During short run? 6 Ans. Extra- normal profit Y TR>TC MC TR/Q > TC/Q AC AR >AC

COST & A R AR=MR=P REVENUE B E

NORMAL PROFITS TR=TC X TR/Q=TC/Q 0 Y AC AR=AC MC

COST & REVENUE P AR=MR=P

X 0 C OUTPUTS

EXTRA NORMAL LOSSES TR

T Q COST & S MR=AR=P REVENUE 0 M X OUTPUT

HOTS Q1. Why should MC be rising at the point of equilibrium? Q2. What happens if the firm increases its output even when MR=MC? Q3. Differentiate between gross profit and net profit of a firm? Q4. Why should a producer production activity even when he is just breaking-even, or when TR=TC? Q5. How are break-even price and MC related to each other in the context of long period equilibrium? Consider a perfectly competitive market? UNIT 1 (4 MARKS) INTRODUCTION

Q1: What is Scarcity? 1 Ans. It is a situation when demand for a good exceeds its supply even at a zero price.

Q2: Define the term Economy? 1 Ans. Economy is a system spread over a particular area reveals the nature and level of economic activities in that area. It shows how people of the concerned area earn their living.

Q3: what is the Production possibility Curve? 1

Ans: Production possibility curve shows different combinations of two goods which can be produced with the given resources on the assumptions that (1).resources are fully and efficiently utilized, and (2). Technique of production remains constant.

Q4: Define Opportunity cost? 1

Ans: Opportunity cost refers to value of a factor in its next best alternative use.

Q5: Explain the problem of “what to produce”. 4 Ans. It is the standard knowledge that resources are scarce in relation to human needs. We cannot produce all goods as much as we wish to produce. Allocation of resources and the consequent problem of choice require that we decide what to produce and what not .we have to decide which wants are to be taken on priority and which ones can wait. It involves two-fold decision: (a).Firstly, the economy has to decide what goods and services are to be produced .for instance which of the consumer goods like sugar, clothes, wheat, ghee etc, are to be produced and which of the capital goods like machines, tractors etc, are to be produced. Similarly, choice has also to be made between the production of war time goods like rifles, guns, tanks and peace time goods like bread or butter. (b).When an economy has taken a decision as to what goods or services are to be produced, and then it has to decide about its quantity. How much of consumer goods and how much of capital goods are to be produced. For instance if an economy decides to produced more of cloth and wheat with in a given period and with limited means, then it will have to produce less of machines. Q6: Explain the problem “How to produce”? 3 Ans: This problem is concerned with the choice of technique of production. For example, production of cloth is possible either by handlooms or by modern machines. This problem is concerned with the efficient use of resources. It implies more production at less cost. Broadly these are two techniques of production: (a) Labour intensive technique: Under this technique labour is used more than capital.

(b) Capital intensive technique: Under this technique, capital is used more than labour. An economy must decide as to which technique is to be used in a given industry so that efficient product6ion is obtained. Efficient technique of production is that which uses the least amount of scarce resources to provide the same amount of output or in other words, the production would be undertaken at minimum cost. The goods and services should be produced efficiently. Q7. Explain the problem “For whom to produce “? 3

Ans. This is the problem of distribution of final goods and services, or briefly the problem of distribution of production. Value of production in an economy is identical with the value of income. Thus, the problem of distribution of production implies the problem of distribution of income. This problem has two aspects:

(a) This first aspect relates to personal distribution .How should production be distributed among different individuals and households of the society? It is also concerned with the problem of inequality in the distribution of income.

(b) The second relates to functional distribution .How should output be distributed among different factors of production viz. land, labour, capital and entrepreneur as their reward for the act of production? It is not related to the problem of inequality.

Q8: Why PPC (production possibility curve) slopes downward? 3

Ans: Production possibility curve slopes downward from left to right it are because in a situation of the fuller utilization of the given resources, production of both the goods cannot be increased. More of goods –X can be produced only with less of goods –Y.

GOOD Y

GOOD X

Q9: Why production possibility curve is concave to the point of origin?

Ans: It is because to produce each additional unit of good-x, more and more units of good-y will have to be sacrificed than before. Opportunity cost of producing every additional unit of good X tends to increase in terms of the loss of production of good Y.

HOTS Q1. If resources are scarce, how do you explain massive unemployment in India? Q2. If production possibility curve shift to the right, should it be parallel to the old one? Q3. If PPC related to wheat and rice (on the x-axis and y-axis respectively) draw diagram showing change in PPC when resources remain constant and technology improves only for wheat?