Production and Costs
Production and Costs tests short-run product curves, cost relationships and the law of variable proportions, with numerical AP/MP and AC/MC questions.
Production
Short run has at least one fixed input; long run all inputs are variable. Total product (TP), average product (AP=TP/L), marginal product (MP=ΔTP/ΔL). Law of variable proportions: MP rises, then falls, then may turn negative; AP rises while MP>AP, falls while MP<AP, and is maximum where MP=AP. Returns to scale describe long-run output response to proportional input increase.
Costs and revenue
Fixed costs do not vary with output; variable costs do. TC=TFC+TVC; AC=TC/Q; MC=ΔTC/ΔQ. MC cuts AC at AC’s minimum. In the long run all costs are variable. Economic cost includes opportunity cost; accounting cost includes explicit payments only. Isoquants show input combinations for a given output; their slope is the marginal rate of technical substitution.
Worked example
A firm’s TFC is ₹100. At Q=10, TVC=₹200, so TC=₹300 and AC=₹30. At Q=11, TC=₹330, so MC=₹30. Since MC equals AC at ₹30, AC is at its minimum around this output. If the MP of the 11th worker is 5 units, marginal cost is wage ÷ MP; with a wage of ₹150, MC=₹30, matching the cost calculation.
Traps
Do not confuse diminishing marginal product with decreasing returns to scale. MP can be negative while TP is still positive. AC falls when MC<AC even if MC is rising. Sunk costs are not part of future marginal decisions. Keep fixed and variable costs separate in short-run shutdown analysis.