Managerial Economics Sayed Abu Sufyan

Lecture No.: 04 Roll No.: ZR 1801005

Dated on: 24th July 2018
Key takeaways of lecture 04

Production Theory: Theory of production, in economics, an effort to explain the principles by which a
business firm decides how much of each commodity that it sells (its “outputs” or “products”).
it will produce, and how much of each kind of labour, raw material, fixed capital good, etc.
Q= f (all inputs).
Total Product (TP) = AP X Variable Factor
Marginal Product (MP) = Change in Total Product / Change in Variable Factor
Average Product (AP) = TP / Variable Factor

Output Elasticity: In economics, output elasticity is the percentage change of output (GDP or
production of a single firm) divided by the percentage change of an input. It is sometimes called
partial output elasticity to clarify that it refers to the change of only one input

Law of Diminishing Return: Diminishing returns, also called law of diminishing returns or principle of
diminishing marginal productivity, economic law stating that if one input in the production of a
commodity is increased while all other inputs are held fixed, a point will eventually be reached at which
additions of the input yield progressively smaller, or diminishing, increases in output.
In the classic example of the law, a farmer who owns a given acreage of land will find that a certain
number of labourers will yield the maximum output per worker. If he should hire more workers, the
combination of land and labour would be less efficient because the proportional increase in the overall
output would be less than the expansion of the labour force. The output per worker would therefore
fall. This rule holds in any process of production unless the technique of production also changes.
Economic scale is linked with return to scale which can be of 3 types
.1. Increased Return to Scale (IRTS) 2. Constant Return to Scale (CRTS) 3. Decreasing Return to Scale
(DRTS).
Qe> 1 indicates IRTS; Qe<1 indicates DRTS; Qe= 1 indicates CRTS

Short Run and Long Run in Economics: The long run is a period of time in which all factors of production
and costs are variable. In the long run, firms are able to adjust all costs, whereas, in the short run, firms
are only able to influence prices through adjustments made to production levels.
The long run is not defined as a specific period of time but is instead defined as the time horizon needed
for a producer to have flexibility over all relevant production decisions. Most businesses make decisions
not only about how many workers to employ at any given point in time (i.e. the amount of labor) but
also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what
production processes to use. Therefore, the long run is defined as the time horizon necessary to not only
change the number of workers but also to scale the size of the factory up or down and alter production
processes as desired.
In contrast, economists often define the short run as the time horizon over which the scale of operation
is fixed and the only available business decision is the number of workers to employ.