Producer Behaviour And Supply Class 11 Notes Economics Chapter 6 - CBSE
Chapter : 6
What Are Producer Behaviour And Supply ?
What Is Production?
“The act of making goods and services and there by adding utility to the object is called production in economics.”
What Is Production Function?
“A production function shows the maximum quantity of a commodity that can be of inputs, when the best production technique avaliable is used.”
Qx = f (L, K)
Where, Qx = Physical Output of commodity X
L = Labour
K = Units of Capital
It is assumed that there are only two inputs, namely labour (L) and capital (K), Qx = f (L,K)
Short run Production Function
- A short run production function refers to a situation when only one input is variable and all other inputs are assumed to be constant.
- Short run production function is the subject matter of “laws of returns”.
Long run Production Function
- A long run production function studies changes in output when all inputs used in the production of a commodity are changed simultaneously and in the same problem.
- Short run production function is the subject matter of “returns to scare”.
Measure Of Production
Total Product
- It refers to the total amount of a commodity produced during a specific period by combining a particular quantity of a variable factor with a given quantity of fixed factor.
Average Product
- Average product or average physical product of a variable factor refers to the output per unit of a variable factor. It is
also called average product. - $$\text{AP}_{\text{L}}=\frac{\text{TP}_{\text{L}}}{\text{L}}$$
Marginal Product
- It is defined as the change in total product resulting from the use of one additional unit of a variable factor.
- MP = TPn - TPn-1
Relationship Between Total Product And Marginal Product
- When MP increaes, TP increases at an increasing rate.
- When MP decreases, TP increases at an diminishing rate.
- When MP = O, TP is maximum.
- When MP is negative, TP declines.
Relationship between Average Product and Marginal Product
- If AP increases, MP > AP
- If AP decreases, MP < AP
- If AP is at its maximum, AP = MP
Law Of Variable Proportions
This law states that as more and more units of a variable factor are applied to the given quantity of a fixed factor, total product may increase at an increasing rate initially , but eventally it will increase at a diminshing rate.
Assumptions of the Law
- The state of technology is given and remains unchanged.
- It is assumed that some inputs are kept fixed while others are carried.
- All units of the variable factor are homogeneous and are equally efficient.
Stages of Production
Stage 1: Stage of Increasing Returns
- TP increases at increasing rate then at diminishing rate.
- MP increases, reaches maximum and then starts decreasing.
- AP increases and reaches maximum.
Stage 2: Stage of Diminishing Returns
- TP increases at diminishing rate and reaches maximum.
- MP continues to decrease and becomes zero.
- AP begins to decreases.
Stage 3: Stage of Negative Returns
- TP diminishes
- MP is negative
- AP continues to decrease, but is always positive.
Cost
It refers to the expenditure incurred by a producer in the production of a commodity.
- Explicit Cost: Money payments made by the firm to the owners of a various factor services in purchasing and using of the factor services required in production of a commodities.
- Implicit Cost: It refers to the estimated value of inputs owned by the firm and used by it in its own production unit.
- Opportunity Cost: The opportunity cost of producing and good is the next best alternative good that is given up to produce the good.
Total Cost
It refers to the sum total of fixed cost and variable cost.
TC = TFC + TVC
Total Fixed Cost
It refers to the total cost incurred by the firm on the use of all fixed factors.
Total Variable Cost
Total Variable cost refers to the total cost incurred by firm on the use of its variable factors.
Average Cost
It refers to the cost per unit of output produced.
$$\text{AC =}\frac{\text{TC}}{\text{Q}}$$
Average Fixed Cost (AFC)
It refers to the per unit cost of the fixed factor
$$\text{AFC =}\frac{\text{TFC}}{\text{Q}}$$
Average Variable Cost (AVC)
AVC is the per unit cost of the variable factors of production.
$$\text{AVC}=\frac{\text{TVC}}{\text{Q}}$$
Marginal Cost
It is the addition to total cost as one more unit of output is produced.
MCn = TCn − TUn-1
Note: Average Cost, Average Variable Cost and Marginal Cost curves are U shaped, in accordance with the law of variable proportions.
Relationship between Average Cost and Marginal Cost
- If AC is falling, AC > MC
- If AC is rising, AC < MC
- If AC is constant, AC = MC
Relationship Between Total Cost And Marginal Cost
- TC increases at an increasing rate, when MC is increasing.
- TC increases at a constant rate when MC is constant.
- TC increases at a diminshing rate when MC is decreasing.
Revenue
It means receipts by a firm from the sale of its product in a given period.
Measures of Revenue
Total Revenue
- It refers to the total amount of income received by the firm from selling a given amount of its product.
- TR = P × Q
TR = Total Revenue
P = Price per unit
Q = Quantity sold
Average Revenue
- It refers to the revenue price per unit of output sold.
$$\text{AR} =\frac{\text{TR}}{\text{Q}}$$
Marginal Revenue
- It refers to the change in total revenue as a result of selling an additional unit of output.
MR = TRn - TRn-1
Note: AR Curve is perfectly elastic under perfect competition (Ed = ∞)
Relationship between Total Revenue and Marginal Revenue
- TR increases at an increasing rate, when MR is increasing.
- TR increases at a diminshing rate when MR is diminishing.
- TR increases at a constant rate when MR is constant.
Relationship between Average Revenue and Marginal Revenue
- If AR is constant, AR = MR
- If AR is diminishing, AR > MR
- MR can be negative but AR cannot
Producer’s Equilibrium
A producer is in equilibrium when at given demand and cost conditions, it produces that level of output at which profit is maximised.
Profits
Difference between TR and TC, π = TR -TC
Economic Profits
- TR-(Explicit Cost+Implicit Cost)
Accounting Cost
- TR-Explicit Cost
Abnormal Profits
- AR > AC or TR > TC
Normal Profits
- TR = TC
Subnormal Profits (or losses)
- AR < AC
Normal Profits
Normal Profits are defined as that amount of profits that are high enough so that firms in the industry are induced to remain in the industry, so that new firms do not want to enter the industry.
Three Necessary Conditions Of Producers’ Equilibrium
- MR = MC
- MC is rising
Note :
- Eqilibrium is attained only when MC is rising.
- Under perfect competition, Price = AR =MR. Accordingly, profit are maximised only when price = MC, not when price < MC or when Price > MC.
Concept Of Supply
Supply of a commodity refers to the quantities of a commodity which produces or sellers are willing to produce and offer for sale at various prices during a particular period of time.
Quantity Supplied
It refers to the specific quantity which a producer is ready to supply at a specific price of the commodity.
Supply Schedule
It refers to the tabular statement showing various quantities which producers are willing produce and sell at various price during a given period of time.
Individual Supply Schedule
- It refers to the tabular statement of various quantities which individual producer are willing to produce and sell at various prices during given period of time.
Market Supply Schedule
- It refers to tabular arrangements of various quantities which are producer are will to produce and sell at various prices during a
given period of time.
Supply Curve
Graphical representation of supply schedule.
Individual Supply Curve
It is a Graphical Representation of individual supply schedule.
Market Supply Curve
It is a graphical representation of market supply schedule.
Determinants of Supply
- Price of the commodity
- Goals of Producers
- Input prices
- Prices of related commodities
- Techniques of production
- Policy of Taxation and subsidies
- Expectation about future prices
- Natural factors
Supply Function
It is a functional statement which states the relationship between the quantity supplied of a commodity and its determinants.
Sn = f(Pn , Pr , Nf , G, Pf ................)
Law Of Supply
It states that, other things remain the same, the quantity of any commodity that firms will produce and offer for sale rises with a rise in its price and falls with or fall in its price.
Assumptions Of Law Of Supply
- No change in price of factors of production.
- No change in technique production.
- No change in goal of the firm.
- No change in price of related goods.
Movement Along The Supply Curve
When the quantity supplied of a commodity rises due to a rise in the price of its own, or falls due to fall in its own price, other factors remain same and it results in change in quantity supplied.
Extension or Expansion of Supply
- Increase in supply, due to increase in price, other factors remaining same.
- Upward movement along the same supply curve.
Contraction of Supply
- Decrease in supply, due to fall in price and other factors remaining same.
- Downward movement along the same supply curve.
Shift Of The Supply Curve
When supply of a commodity changes because of change in factors other than its own price, it results in shift of supply curve.
Increase in Supply
- Increase in supply of a commodity due to change in factors other than its own price.
- Rightward shift of supply curve.
Decrease in Supply
- Decrease in supply of a commodity due to change in factors other than its own price.
- Leftward shift of supply curve.
Price Elasticity Of Supply
Price elasticity of supply measures the degree of responsiveness of the quantity supplied of a commodity to a change in its price.
$$\text{E}_{s}=\\\frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}}$$
Degrees of Elasticity of Supply
Perfectly Elastic Supply
- Quantity supplied responds by an infinite amount to a very small change in price.
Es = ∞
Perfectly Inelastic Supply
- No change in supply with change in price.
Es = 0
Unitary Elastic Supply
- Percentage change in quantity supplied percentage change in price.
Es = 1
Elastic Supply
- Percentage change in quantity supplied > percentage change in price.
Es > 1
Inelastic Supply
- Percentage change in quantity supplied < percentage change in price.
Es < 1
Measurement Of Price Elasticity Of Demand
Percentage Method
$$\text{E}_{s}=\\\frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}}\\\text{E}_{s}=\frac{\Delta \text{Q}}{\Delta \text{P}}×\frac{\text{P}}{\text{Q}}$$
