Chapter 3 – Production and Costs
Q1. What is production in economics?
Production refers to the process of converting inputs (like land, labour, capital) into outputs (goods and services) to satisfy human wants.
Q2. What are the factors of production?
The four basic factors are:
- Land
- Labour
- Capital
- Entrepreneur (or organisation)
Q3. What is the production function?
It shows the functional relationship between inputs and output:
Q = f(L, K), where Q = output, L = labour, K = capital.
Q4. What are the short-run and long-run in production?
Short-run: At least one input is fixed.
Long-run: All inputs can be changed.
Q5. What is Total Product (TP)?
Total output produced by using given units of inputs.
Q6. What is Marginal Product (MP)?
Additional output produced by using one more unit of a variable input, keeping other inputs constant.
Q7. What is Average Product (AP)?
Total product divided by the number of units of variable input used: AP = TP / L
Q8. What is the law of variable proportions?
As more units of a variable input are added to fixed inputs, MP first rises, then falls, and eventually becomes negative.
Q9. What are the three stages of the law of variable proportions?
- Increasing returns
- Diminishing returns
- Negative returns
Q10. What is the relation between MP and TP?
- When MP rises, TP increases at increasing rate
- When MP falls but is positive, TP increases at decreasing rate
- When MP is zero, TP is maximum
Q11. What is the relation between MP and AP?
- If MP > AP, AP rises
- If MP = AP, AP is maximum
- If MP < AP, AP falls
Q12. What are returns to scale?
In the long run, when all inputs are changed:
- Increasing returns to scale
- Constant returns to scale
- Decreasing returns to scale
Q13. What is cost of production?
Cost incurred in producing goods/services using inputs. It includes explicit and implicit costs.
Q14. What is Total Cost (TC)?
Sum of total fixed cost (TFC) and total variable cost (TVC):
TC = TFC + TVC
Q15. What is Total Fixed Cost (TFC)?
Costs that remain constant regardless of output, like rent, salaries.
Q16. What is Total Variable Cost (TVC)?
Costs that vary with output, like raw materials, fuel, wages for extra labour.
Q17. What is Average Cost (AC)?
Cost per unit of output:
AC = TC / Q
Q18. What is Average Fixed Cost (AFC)?
Fixed cost per unit:
AFC = TFC / Q
Q19. What is Average Variable Cost (AVC)?
Variable cost per unit:
AVC = TVC / Q
Q20. What is Marginal Cost (MC)?
The additional cost incurred to produce one extra unit of output:
MC = Change in TC / Change in Q
Q21. Why is AFC a downward-sloping curve?
Because fixed costs remain constant and are spread over more units as output increases.
Q22. Why is AVC U-shaped?
Initially, increasing returns cause AVC to fall; later, diminishing returns make AVC rise.
Q23. Why is AC U-shaped in the short run?
Due to the behavior of AVC and AFC — AVC first falls then rises; AFC always falls, making AC U-shaped.
Q24. What is the relation between AC and MC?
- When MC < AC, AC falls
- When MC = AC, AC is minimum
- When MC > AC, AC rises
Q25. What causes a shift in cost curves?
Changes in input prices, technology, or taxation policies can shift cost curves.
Q26. What is explicit cost?
Costs that involve actual monetary payments like wages, rent, and materials.
Q27. What is implicit cost?
Costs of using self-owned resources, not paid out — e.g., owner’s time or capital.
Q28. What is normal profit?
Minimum profit needed to keep a firm in business — included as implicit cost.
Q29. What is the difference between accounting and economic cost?
Accounting cost = Explicit cost
Economic cost = Explicit + Implicit cost
Q30. What is break-even point?
The level of output where Total Revenue = Total Cost, meaning no profit, no loss.