Professional Documents
Culture Documents
DECISION MAKING
Contents :
Production:
Hemant Shetty (40) & Kamakhya Narayan (19)
Cost Analysis:
Hetal Desai (10) & Gohil Jayesh (13)
Decision Analysis:
Kuntal Rastogi (33)
PRODUCTION :
Theory of Firm
- Production technologies
- Cost Constraints
- Input Choices
Factors of Production
Production function
q = F(K,L)
We will begin looking at the short run when
only one input can be varied
We assume capital is fixed and labor is
variable
Output can only be increased by
increasing labor
Must know how output changes as the
amount of labor is changed
Production: One Variable
Input
Average product of Labor - Output per unit of
a particular product
Measures the productivity of a firm’s labor in
terms of how much, on average, each worker
can produce
Avg Prod of Labor = output/Labor Input
Production: One Variable
Input
Marginal Product of Labor – additional output
produced when labor increases by one unit
Change in output divided by the change in
labor
Marg Prod of Labor = change in output/change in labor input
Production: One Variable
Input
Product Curves
40
Labor
250 500 760 1000
There are following types of costs:
Classification of costs into
- Direct costs
- Indirect costs
- Finance costs
Types of Costs
1) Opportunity cost
2) Money cost
- Explicit
- Implicit
3) Sunk costs
4) Accounting Cost
Categorisation of costs (important for decision making process)
output is y3
( refer the intersection
point of MC )
And P3 = AVC
Case 5:
Price falls below P3 or‘f’ output is less than y3
(i.e. doesnot touch min point (refer the intersection point
of AVC) of MC )
i.e. If p3 < Min AVC (market price is less than Min AVC)