MOHAMMAD ALI JINNAH UNIVERSITY

KARACHI

MICRO ECONOMICS
ASSIGNMENT

SUBMITTED BY:
TOOBA HASSAN
FA22-BSAF-0018
SUBMMITED TO:
MS HINA FATIMA
 THEORY OF PRODUCTION
SUMMARY
PRODUCTION:
Production is a process of combining various inputs to produce an
output. The product is also an act of producing the goods and
services.
If we say Y= (k, l). Output (Y) is the function of input. Output is a
dependent factor while input is the independent factor.
Q-= output= f (L, K, R, LD, T, t)
Where,
 L= Labor
 K= Capital
 R= Raw material
 Ld= Land
 T= Technology
 t= time
SHORT RUN AND LONG RUN
FUNCTION

SHORT RUN FUNCTION= Less than 1 year

It is also called single production. In this function some factor of
production means one of the input is fixed and some are variable
like labor changes. Output can be increased only by increasing
the application of the variable factor.
LONG RUN FUNCTION= More than 1 year
This function is also called returns to scale. In this, everything can
be change means both labor and capital are variable input.
There’s no fixed factor.
RELATIONSHIP BETWEEN TOTAL,
AVERAGE, MARGINAL PRODUCT:
Total Product (TP):
 Total product refers to the total amount of output that a firm
produce within a given period which mean,
Total Product= total quantity of output.
TP = Q = Y= f (L)

Average Product (AP):

Average product is equal to the total product per total input
AP = TP/L
Marginal Product (MP):

Fixed Variabl Total Product Average Marginal

Input e Input TP = Q = Y= f Product Product
(land) (labor) (L) AP = TP/L MP= ΔTP/ ΔL
4 1 8 8
4 2 20 10 12
4 3 36 12 16
4 4 48 12 12
4 5 55 11 7
4 6 60 10 5
4 7 60 8.6 0
4 8 56 7 -4
The increase in output that arises from an additional unit of
input
MP=Current Output-Previous Output/Current Labor-Previous labor

STAGE 1 STAGE II STAGE III

Stage I:
The range of increasing average product of the variable
input.

From zero units of the variable input to where AP is maximized

Stage II:
The range from the point of maximum AP of the variable to the
point at which the MP of is zero.
 From the maximum AP to where MP=0

Stage III: The range of negative marginal product of the

variable input.
From where MP=0 and MP is negative.

RETURNS TO SCALE
INCREASING RETURNS TO SCALE:
“One change in input there is double change in output.”
(increase with increasing rate)
CONSTANT RETURNS TO SCALE:
“The one more change in input, the output will be
constant.”
DECREASING RETURNS TO SCALE:
“The increase in one unit of input result the decrease in
output.”
 THEORY OF COST
SUMMARY
COST:
Cost is best described as a sacrifice made in order to get
something.

COST FUNCTION:
The cost function measures the minimum cost of producing a
given level of output for some fixed factor prices.

SHORT RUN COST AND LONG

RUN COST FUNCTION

SHORT RUN COST FUNCTION:

Short run is the cost over a period during which some of factors of
production are fixed.
LONG RUN COST FUNCTION:
In long run there are no fixed factor of production and hence, no
fixed cost. In long run all factors are variable that’s why all cost are
also variable.

RETURNS TO SCALE
Increasing returns to scale (IRS):
IRS refers to a production process where an increase in the
number of unit produces cause a decrease in the average
cost of each unit.
Constant returns to scale (CRS):
CRS refers to a production process where an increase in the
number of units produced no change in the average cost.
Diminishing returns to scale (DRS):
DRS refers to production where the cost for production start
increasing as result of increasing production. The DRS is opposite
of IRS.
 TYPES OF COST:
Fixed Cost (FC) or Supplementary Cost:
The cost that remains fixed at any level of output. These cost has
to be paid whether the production is being performed or not.
Variable Cost (VC) or Prime Cost:
It is the cost that vary with the quantity of input produced.
Total Cost (TC):
The amount of money spent on the production of different levels
of a good.
OR
Total cost is determined by adding total fixed cost and total
variable cost.
TC=TFC+TVC
1. Average Cost (AC):
The average cost of production is the total cost per unit of
output. Average Cost is determined by dividing total cost by
quantity of output.
AC=TC/Q
2. Average Fixed Cost (AFC):
Average fixed cost is determined by dividing fixed cost by
quantity of output
AFC=TFC/Q
3. Average Variable Cost (AVC):
Average variable cost is calculated by dividing variable
cost by the quantity of output.
AVC=TVC/Q
4. Marginal Cost:
The increase in total cost that arises from an extra unit of
production.
MC=Current total Cost-Previous total cost
Current Output-Previous output

OR
MC= ΔTC/ ΔQ
 Unit Fixed Variable Total Average Average Average Marginal
of Cost Cost Cost Cost Fixed Variable Cost
output (FC) (VC) (TC) (AC) Cost Cost (MC)
(Q) (AVC) (AVC)
1 20 10 30 30 20 10 30
2 20 25 45 22.5 10 12.5 15
3 20 32 52 17.3 6.7 10.7 7
4 20 38 58 14.5 5 9.5 6
5 20 44 64 12.8 4 8.8 6
6 20 48 68 11.3 3.3 8 4

AC is curved shaped because initially it falls and after reaching

the minimum point it starts rising upwards. The point, where AC is
minimum is called the optimum point.
MC curve is U shaped because in the starting of production, the
firm enjoys many economies which cause the MC to fall. As the
output continues to increase the marginal cost starts rising and
becomes minim.
 PERFECTLY COMPETITIVE
MARKET
SUMMARY
Perfect competitive market is a market where firms are selling the
same product, and because of having no control over their
product prices.
CHARACTERISTICS OF PERFECTLY COMPETITIVE
MARKET:
 In perfectly competitive market there are large no. of buyer
and seller.
 Goods are homogeneous.
 Easy entry and exit in the market.
 You can choose quantity but you can't choose the prices.
 They are price takers.
In perfect competition,
1. Total Revenue = Price* Unit of output
2. Average Revenue = Total Revenue/Unit of output
Change in total revenue from an additional unit of output is called
marginal revenue.
3. MR= Change in total revenue/ change in units
In perfectly competitive market, why MR=P?
Because there are large no. of buyer and seller, both are price
takers. In this prices are fixed because they don't have control
over price.
What is profit maximization?
It is a point where MR=MC, after that point if firm produce more
there will be loss.

SHUTDOWN/ EXIT IN SHORT AND LONG RUN:

The firm will shut down in short run when price will be less than
average variable cost. But in this case the firm still have to pay
the fixed cost. But in this, FC is sunk cost (cost that have been
incurred and cannot be recovered).
P<AVC
 In long run firm exit from the market because the price will be
less than average total cost
P<ATC
CONDITIONS IN PC:
 There are 3 conditions if:
 MR<MC, there will be loss.

 MR>MC, there will be profit

 MR=MC, there will be no profit no loss

 A firm enter in the market when price is greater than average

total cost
o P>ATC
 If the average total cost curve is below the MR=MC point
which is also called optimum point and price is greater than
cost than there will be profit
 If the average total cost curve is above the MR=MC point
which is also called optimum point and cost is greater than
price than there will be loss
 If the average total cost curve is on the MR=MC point which
is also called optimum point and price is equal to the cost
than there will be no profit no loss.
 MONOPOLY
SUMMARY
A market structure characterized by a single seller, selling a
unique product in the market.
CHARACTERISTICS OF MONOPOLY:
 In monopoly, there are large no. of buyer and one seller in the
market.
 Firms are price makers.
 Barrier to entry in the market, you have to inform government
before leaving and enter in the market.
 Seller have control on both price and quantity
 In monopoly, MR < P.
KEY DIFFERENCE: A monopoly firm has market power.

 The reason why MR < P and price is only equals to AR

because to sell a larger Quantity, the firm must reduce
Price.
 In monopoly, MR curve is downward because they are
price maker, to produce one unit of output the firm will
reduce the price. Marginal revenue is less than price.
 In monopoly also profit maximization is where MR=MC.

1. The ATC curve will be downward if cost is less than price

that means profit
2. The ATC curve will be upward if cost is greater than price
that means loss
The ATC curve will be on optimum point,
(MR=MC) when price is equals to cost
PRICE:

PRICE DISCRIMINATION:
Price discrimination refers to the sells the same goods
to different buyers at different price
SINGLE PRICE MONOPOLYIn Single Price
Monopoly the monopolist sells the same good at same
or single price to buyers
 PERFECT PRICE DISCRIMINATION:
In perfect price discrimination the seller sells the good
to buyer according to buyer’s willingness to pay.
 In real world price discrimination doesn’t exist because
every firm doesn’t have idea about the buyer’s WTP.
 Public Policy Toward Monopolies:
1. Increasing competition with antitrust laws
2. Regulation
3. Public ownership
4. Doing nothing
 MONOPOLISTIC
COMPETITION
SUMMARY

A market structure in which firms sell products that

are similar but not identical.
 Differences between:
PERFECTLY MONOPOLY MONOPOLISTIC
COMPETITIVE COMPETITION
MARKET
1. Large number of Single seller and Large number of
buyers and many buyers buyers and sellers
sellers
2. Goods are Single goods Goods are same but
homogenous not identical
3. Free entry and No free entry and Free entry and exit
exit exit
4. Price takers Price makers Price makers

 MR<P and the firm produces the output MR=MC.

 In short run if there is profit the new firms will enter in the
market which causes profit loss for already existing firms
 And if there is loss in short run some firms exit the market and
other will enjoy the higher demands and prices
 In long run entry and exit occurs until P=ATC and profit is zero
 Monopolistic competitive is less efficient because they have the
excessive capacity to produce but they only produce cost
minimizing output rather than ATC minimizing
 In monopolistic competitive firms advertising is necessary
because products are not identical and there is large number of
sellers, so there is high competition