Q.
Diminishing marginal rate of
substitution:
Marginal means small change. The Chang is
one unit. Marginal rate of substitution
consumer tend to exchange one good for
another.
Diminishing marginal rate of substitution is the
consumers tend to exchange a little Len of one
good for in return a little more if another.
Gradually when the curve become flatter the
consumer sacrifices less food for more shelter.
Q. Consumer Equilibrium / best affordable
bundle?
Consumer equilibrium is attained at the point where
the budget line is tangent to the highest indifference
curve.
Here bundle E not affordable but other bundles
are affordable. Bundle B is better then A,D,C.
because higher bundle is better. It is point to
tendency. Bundle B is consumer equilibrium
or best offer able bundle.
* Budget constraint represents marginal cost of
food for shelter one the other hand indifference
curve represent marginal benefit of food for
shelter.
Q. Theory of production/ Production function?
1. Production is an activity which creates present
and future utility.
2. Production is a process while input turns into
output.
Production Function:
Production function is a relationship how input turn
output.
Quantity=Q, Capital=K, Function= F, Labor=L
Q=F(K,L)
Production function two types:
1. Short run function: one year or less time.
Just like change labor. We define the short
run as a period in which a firms can adjust
production by change variable factors
such as materials and labor but cannot
change fixed factors such a capital
2. Long run function: the long run is a period
sufficiently long that all factors including
capital can be adjusted. More than one
year.
Short run production function two types…
1. Linear production function /
Straight-line
2. Curvilinear production
function:
The law of diminishing return: under this law,
a firm will get less and less extra output when
it adds additional units of an input while
holding other inputs fixed.
In other words, the marginal product of each
unit of input will decline as the amount of that
input increase, holding all other inputs
constant.
Limitation of capital after labor 6 decrease the
production.

Q * Technological impact in
* Return to Scale: The rate at which output
production: increases when all input are increased
proportionately that called return to scale.
There are three types of return to scale…
1. Constant returns to scale.
2. Increasing return to scale. (Economic of
scale)
3. Decreasing return to scale.
1. Constant returns to scale: If all inputs
double and output is exactly doubled, that
process is said to exhibit constant returns to
scale. Increase input of production
proportionately the production also increases.
Ex: 50% input and output 50%.
Thomas Malthas 2. Increasing return to scale: If your input 50%
But Technological improvement increase then you will get output 100%.
production.
Average production of Labor: 3. Decreasing return to scale: Input 40% output
30% because of inefficiency.

Change of total production due to change of 1 * Break Even point: In this point company
unit of labor that is marginal production. run in No loss, No Profit.
Profit=TC-Tr=0.
* Long run production function:
In short run production function capital well
mixed. Long run production function we need
to change capital also labor. ISO
Quantity=equal quantity.

* Shutdown Point: M1 is our Shutdown point.

It is losing point, when we touch M1 then we
need to close the operation.

ISO quant Map: * Marginal Analysis of decision making:

TR= Total Revenue,
X= Independent Variable,
Y= Dependent Variable
TR=f(Q), Y=f(X)

Marginal base on

Profit:

Here our productions are same. But we only

change only input of labor and quality of
materials. Mainly combination of input will be
different. When out marginal profit zero that is high
profit maximization.
* 7 Types of cost.
1. Total cost (TC): Total cost describe the total * Revenue Maximization:
economic cost of production and is made up MR=0
variable cost (include inputs such as labor and
raw materials) plus. TC=FC+VC

2. Fixed cost (FC): FC is related to fixed input.

It is short run. Machine is our capital. If one
machine run 1, that is one machine 1
mach/hour.

3. Variable cost (VC): VC is related to variable

input such as labor. Labor is variable input.
One person work one hour that is one person
hour.

4. Average total cost (ATC):

Q3 point we can earn highest revenue.

* Revenue Maximization Situation:

5. Average fixed total cost (AFC):

6. Average variable cost (AVC):

* Long term investment planning:

By capital budgeting mechanism three
types.
7. Marginal Cost (MC): MC is small change. 1. NPV= Net present Value.
Marginal cost is the change of total cost with a
increase one unite of output. Marginal cost
related to change of variable cost.
2. Irr= Internal rate of return:

3. Payback Period:

Time value of return = IRR * PV=0