## Useful Notes on Short-Run Equilibrium of Competitive Firm–Earning only Normal Profits

The competitive firm in equilibrium always chooses the output for which price (AR = MR) = MC is above the level of average variable cost (AVC). The short-run equilibrium price of a competitive firm can be equal to or more than it’s AVC, but, cannot be less than AVC. The minimum price which can induce […]

## Useful Notes on Total Variable Cost (TVC)?

However, the maximum quantity of the output that can be purchased depends upon the quantity of the fixed factors of production. Marshall calls the variable cost as prime cost. It is also called direct cost, since it varies directly with the change in the level of output. Total variable cost is graphically shown in Fig. […]

## Useful Notes on Average Fixed Cost?

Suppose, Kapil Khurana incurs an expenditure of Rs. 20,000/- on installing a stone cutter machine. If he cuts 10,000 pieces of stones during the first month of installation, the average fixed cost will be Rs. 20,000/10,000 = Rs. 2. When the number of pieces he cuts increases to 20,000, the average fixed cost falls to […]

## What is the Relationship between Product and Cost? – Explained!

Average variable cost (AVC) = TVC/Q => AVC = N x P/Q = P. (1/AP) Here, ‘P’ is the price per unit of the variable factor. Substituting equation (9.1) in equation (9.2) we get AVC=P. (1/AP) Thus, average variable cost is equal to the price of the input multiplied by the reciprocal of its average […]

## Useful Notes on the Effect of Change in Factor Prices and Factor Combinations on the Productions

These alternations in factor combinations as a result of changes in price are known as factor price effect or simply price effect. This effect is partly due to output effect (greater use of an input as higher level of output is produced) and partly due to technical substitution effect (costly input being replaced by a […]

## What is the Concept of Elasticity of Factor Substitution? – Explained!

It measures the relative extent to which one factor will be replaced by the other, whenever there is change in their relative prices. For example, if capital becomes cheaper, the producer will substitute capital for labour. On the other hand, if wages (price of labour) fall, the producer will use relatively more labour than capital. […]

## What is the Concept of Elasticity of Factor Substitution? – Explained!

It measures the relative extent to which one factor will be replaced by the other, whenever there is change in their relative prices. For example, if capital becomes cheaper, the producer will substitute capital for labour. On the other hand, if wages (price of labour) fall, the producer will use relatively more labour than capital. […]

## 3 Most Important Stages of Law of Variable Proportions of Production

The variations in the total, average and marginal product by varying the quantity of variable factor are shown in this figure. Here, total product (TP) goes on rising to a point and after that it starts falling. Average and marginal product curves also rise and then decline. However, marginal product curve falls earlier than the […]

## Useful Notes on the Laws of Production through Iso-quants

In Fig. 8.5, ‘L’ units of labour and ‘K’ units of capital are needed to produce (say) 100 units of output. If both the factors of production were doubled to ‘2 L’ and ‘2K’, output is doubled to 200 units”. Thus, the production function shows constant returns to scale. However, if capital were kept constant […]

## Useful Notes on the Expansion Path Theory of Production

Expansion path may be defined as the locus of efficient combinations of the factors (the points of tangency between the isoquants and the iso-cost lines). It is the curve along which output or expenditure changes, when factor prices remain constant. Hence, the optimal proportion of the inputs will remain unchanged. It is also known as […]

## Useful Notes on Iso-Cost Line of Optimum Combination of Factors (Consumer Theory)

X-axis and those of factor ‘Y’ on the Y-axis. Suppose, the firm has at its disposal Rs. 200 for the two factors. The price of the factor ‘X’ is Rs. 10 per unit and that of factor ‘Y’ is Rs. 5 per unit. With outlay of Rs. 200, the firm can buy either 10 units […]

## What is Production Function? (in Economies) – Explained!

‘Q’ stands for the quantity of output, ‘K’, ‘L’, ‘1’ and ‘O’ stand for the quantities of capital, labour, land and organization (factors of production) respectively used in producing output. Output quantity, thus, depends on the quantities of these inputs. The above production function describes the technological or engineering relationships involved between the factors of […]

## 2 Important Ways in which the Problem of Constrained Maximum can be Solved Mathematically

Subject to C = w L + r K (cost constraint) Where ‘w’ and ‘r’ are factor prices for labour and capital respectively. This problem of constrained maximum can be solved by using Lagrangian multipliers. Since there is only one constraint in this problem, we will use one Lagrangian multiplier, say ?. The augmented objective […]

## Useful Notes on Least Cost Combination of Factors (Economies)

Similarly, when the series of iso-cost lines and one isoquant is given, then the producer equilibrium will be at the point, where the given isoquant touches the lowest possible iso-cost line (E2 in Fig. 7.10 (b)). All other points are either not desirable (implying higher total cost indicated by points lying on higher iso-cost line […]

## 3 Most Important Assumptions of Revealed Preference Theory

In other words, if an individual chooses combination (or bundle) ‘A’ in one situation (given by his budget constraint) in which bundle ‘B’ was also available to him, he will not choose combination ‘B’ in any other situation (given by his new budget constraint) in which combination ‘A’ is also available. If he chooses combination […]