Important Questions: Producer Behaviour & Supply Class 12 Notes | EduRev

Class 12 : Important Questions: Producer Behaviour & Supply Class 12 Notes | EduRev

 Page 1


26 XII ?  Economics
AK
UNIT 3
PRODUCTION BEHAVIOUR AND
SUPPLY
POINTS TO REMEMBER
q Total production refers to the sum total of production done by using all units
of variable factors over a given period of time.
q Average production is the per unit output of variable factor (labour) employed.
AP = 
TP
variable input
q Marginal product is addition to total product resulting from employing one
additional unit of variable input.
q Returns to a factor : In a short period when additional units of variable
factors are employed with given fixed factors, then returns to a factor
operates. Returns to a factor shows the changes in total products, marginal
product which arises due to change in ratio between fixed and variable
factor. They are as follows :
(A) Increasing returns to a factor : In the initial stage as more and
more units of variable factor are employed with fixed factor total physical
production increases at increasing rate.
(B) Diminishing returns to a factor : As more and more units of variable
factors are employed with fixed factors, then total product increases at
diminishing rate.
(C) Negative returns to a factor : This is the last stage of returns to a
factor. As more and more units of variable factors are employed with
given fixed factors, total production starts decreasing and marginal
product becomes negative.
Relation between Total, Average and Marginal Product
1. So long as marginal product rises, total product increases at increasing
rate.
Page 2


26 XII ?  Economics
AK
UNIT 3
PRODUCTION BEHAVIOUR AND
SUPPLY
POINTS TO REMEMBER
q Total production refers to the sum total of production done by using all units
of variable factors over a given period of time.
q Average production is the per unit output of variable factor (labour) employed.
AP = 
TP
variable input
q Marginal product is addition to total product resulting from employing one
additional unit of variable input.
q Returns to a factor : In a short period when additional units of variable
factors are employed with given fixed factors, then returns to a factor
operates. Returns to a factor shows the changes in total products, marginal
product which arises due to change in ratio between fixed and variable
factor. They are as follows :
(A) Increasing returns to a factor : In the initial stage as more and
more units of variable factor are employed with fixed factor total physical
production increases at increasing rate.
(B) Diminishing returns to a factor : As more and more units of variable
factors are employed with fixed factors, then total product increases at
diminishing rate.
(C) Negative returns to a factor : This is the last stage of returns to a
factor. As more and more units of variable factors are employed with
given fixed factors, total production starts decreasing and marginal
product becomes negative.
Relation between Total, Average and Marginal Product
1. So long as marginal product rises, total product increases at increasing
rate.
27 XII ?  Economics
AK
2. Marginal product starts falling but remains positive, total product rises
at diminishing rate in this stage.
3. When marginal product becomes negative, then total product starts
falling in this stage.
4. So long as average production is less than marginal product, average
production increases Marginal product intersects average product at
the point where average product is maximum. After this average product
starts falling and is more than marginal product in this stage.
q Cost : Cost is the sum of direct (explicit cost) and indirect cost (implicit
cost).
q Those monetary payments, which are incurred by producers for payment
those of factor and non-factor inputs which are not owned by produces are
called Direct Cost.
q Implicit cost is the cost of self owned resources of the production used in
production process.
q Total cost is the sum of total fixed cost and total variable cost.
TC = TFC + TVC  or TC = AC X Q
q Total fixed cost remains constant at all levels of output. It is not zero even
at zero output level. Therefore, TFC curve is parallel to OX-axis.
TFC = TC ? TVC or TFC = AFC × Q
q Total variable cost is the cost which vary with the quantity of output produced.
It is zero at zero level of output. TVC curve is parallel to TC curve.
TVC = TC ? TFC  or TVC = AVC × Q
q Average cost is per unit of total cost. It is the sum of average fixed cost and
average variable cost.
AC = 
TC
Q
  or AC = AFC + AVC
Page 3


26 XII ?  Economics
AK
UNIT 3
PRODUCTION BEHAVIOUR AND
SUPPLY
POINTS TO REMEMBER
q Total production refers to the sum total of production done by using all units
of variable factors over a given period of time.
q Average production is the per unit output of variable factor (labour) employed.
AP = 
TP
variable input
q Marginal product is addition to total product resulting from employing one
additional unit of variable input.
q Returns to a factor : In a short period when additional units of variable
factors are employed with given fixed factors, then returns to a factor
operates. Returns to a factor shows the changes in total products, marginal
product which arises due to change in ratio between fixed and variable
factor. They are as follows :
(A) Increasing returns to a factor : In the initial stage as more and
more units of variable factor are employed with fixed factor total physical
production increases at increasing rate.
(B) Diminishing returns to a factor : As more and more units of variable
factors are employed with fixed factors, then total product increases at
diminishing rate.
(C) Negative returns to a factor : This is the last stage of returns to a
factor. As more and more units of variable factors are employed with
given fixed factors, total production starts decreasing and marginal
product becomes negative.
Relation between Total, Average and Marginal Product
1. So long as marginal product rises, total product increases at increasing
rate.
27 XII ?  Economics
AK
2. Marginal product starts falling but remains positive, total product rises
at diminishing rate in this stage.
3. When marginal product becomes negative, then total product starts
falling in this stage.
4. So long as average production is less than marginal product, average
production increases Marginal product intersects average product at
the point where average product is maximum. After this average product
starts falling and is more than marginal product in this stage.
q Cost : Cost is the sum of direct (explicit cost) and indirect cost (implicit
cost).
q Those monetary payments, which are incurred by producers for payment
those of factor and non-factor inputs which are not owned by produces are
called Direct Cost.
q Implicit cost is the cost of self owned resources of the production used in
production process.
q Total cost is the sum of total fixed cost and total variable cost.
TC = TFC + TVC  or TC = AC X Q
q Total fixed cost remains constant at all levels of output. It is not zero even
at zero output level. Therefore, TFC curve is parallel to OX-axis.
TFC = TC ? TVC or TFC = AFC × Q
q Total variable cost is the cost which vary with the quantity of output produced.
It is zero at zero level of output. TVC curve is parallel to TC curve.
TVC = TC ? TFC  or TVC = AVC × Q
q Average cost is per unit of total cost. It is the sum of average fixed cost and
average variable cost.
AC = 
TC
Q
  or AC = AFC + AVC
28 XII ?  Economics
AK
q Average fixed cost is per unit of total fixed cost.
AFC = 
TFC
Q
 or AFC = AC ? AVC
q Per unit of total variable cost is called average variable cost.
AVC = 
TVC
Q
 or  AVC = AC ? AFC
q Net increase in cost for producing one additional unit is called marginal
cost.
MC
n 
= TVC
n
 ? TVC
n?1
 or MC = 
TVC
Q
D
D
Relation Between Short-Term Costs
q Total cost curve and total variable cost curve remains parallel to each
other. The vertical distance between these two curves is equal to total fixed
cost.
q TFC curve remains parallel to X aixs and TVC curve remains parallel to TC
curve.
q With increase in level of output, the vertical distance between AFC curve
and AC curve goes on increasing. On contrary the vertical distance between
AC curve and AVC curve goes on decreasing but these two curves never
intersect because average fixed cost is never zero.
q Marginal cost curve intersects average cost curve and average variable
cost curve at their minimum point. After the point of intersection with increase
in output, AC curve and AVC curve starts rising.
q MC curve remains under the AC and AVC curve before inter section point
but after inter section point AC and AVC curve remains under the MC curve.
q Average cost and average variable cost falls till they are more than marginal
cost. When these two costs are less than marginal cost, in that situation
both (AC and AVC) rise.
q Money received from the sale of product is called revenue.
q Total revenue is the amount received from the sale of given units of a
commodity over a particular period of time.
TR = AR × Q  or  TR= SMR
Page 4


26 XII ?  Economics
AK
UNIT 3
PRODUCTION BEHAVIOUR AND
SUPPLY
POINTS TO REMEMBER
q Total production refers to the sum total of production done by using all units
of variable factors over a given period of time.
q Average production is the per unit output of variable factor (labour) employed.
AP = 
TP
variable input
q Marginal product is addition to total product resulting from employing one
additional unit of variable input.
q Returns to a factor : In a short period when additional units of variable
factors are employed with given fixed factors, then returns to a factor
operates. Returns to a factor shows the changes in total products, marginal
product which arises due to change in ratio between fixed and variable
factor. They are as follows :
(A) Increasing returns to a factor : In the initial stage as more and
more units of variable factor are employed with fixed factor total physical
production increases at increasing rate.
(B) Diminishing returns to a factor : As more and more units of variable
factors are employed with fixed factors, then total product increases at
diminishing rate.
(C) Negative returns to a factor : This is the last stage of returns to a
factor. As more and more units of variable factors are employed with
given fixed factors, total production starts decreasing and marginal
product becomes negative.
Relation between Total, Average and Marginal Product
1. So long as marginal product rises, total product increases at increasing
rate.
27 XII ?  Economics
AK
2. Marginal product starts falling but remains positive, total product rises
at diminishing rate in this stage.
3. When marginal product becomes negative, then total product starts
falling in this stage.
4. So long as average production is less than marginal product, average
production increases Marginal product intersects average product at
the point where average product is maximum. After this average product
starts falling and is more than marginal product in this stage.
q Cost : Cost is the sum of direct (explicit cost) and indirect cost (implicit
cost).
q Those monetary payments, which are incurred by producers for payment
those of factor and non-factor inputs which are not owned by produces are
called Direct Cost.
q Implicit cost is the cost of self owned resources of the production used in
production process.
q Total cost is the sum of total fixed cost and total variable cost.
TC = TFC + TVC  or TC = AC X Q
q Total fixed cost remains constant at all levels of output. It is not zero even
at zero output level. Therefore, TFC curve is parallel to OX-axis.
TFC = TC ? TVC or TFC = AFC × Q
q Total variable cost is the cost which vary with the quantity of output produced.
It is zero at zero level of output. TVC curve is parallel to TC curve.
TVC = TC ? TFC  or TVC = AVC × Q
q Average cost is per unit of total cost. It is the sum of average fixed cost and
average variable cost.
AC = 
TC
Q
  or AC = AFC + AVC
28 XII ?  Economics
AK
q Average fixed cost is per unit of total fixed cost.
AFC = 
TFC
Q
 or AFC = AC ? AVC
q Per unit of total variable cost is called average variable cost.
AVC = 
TVC
Q
 or  AVC = AC ? AFC
q Net increase in cost for producing one additional unit is called marginal
cost.
MC
n 
= TVC
n
 ? TVC
n?1
 or MC = 
TVC
Q
D
D
Relation Between Short-Term Costs
q Total cost curve and total variable cost curve remains parallel to each
other. The vertical distance between these two curves is equal to total fixed
cost.
q TFC curve remains parallel to X aixs and TVC curve remains parallel to TC
curve.
q With increase in level of output, the vertical distance between AFC curve
and AC curve goes on increasing. On contrary the vertical distance between
AC curve and AVC curve goes on decreasing but these two curves never
intersect because average fixed cost is never zero.
q Marginal cost curve intersects average cost curve and average variable
cost curve at their minimum point. After the point of intersection with increase
in output, AC curve and AVC curve starts rising.
q MC curve remains under the AC and AVC curve before inter section point
but after inter section point AC and AVC curve remains under the MC curve.
q Average cost and average variable cost falls till they are more than marginal
cost. When these two costs are less than marginal cost, in that situation
both (AC and AVC) rise.
q Money received from the sale of product is called revenue.
q Total revenue is the amount received from the sale of given units of a
commodity over a particular period of time.
TR = AR × Q  or  TR= SMR
29 XII ?  Economics
AK
q Per unit revenue received from the sale of given units of a commodity is
called average revenue. Average revenue is equal to price.
AR = 
TR
Q
 or  
P Q
Q
´
 = P = Price.
q Marginal revenue is net addition to total revenue when one additional unit
of output is sold.
MR = 
TR
Q
D
D
q Behaviour of TR, AR and MR when per unit price remains constant or firm
can sell additional quantity of a good at same price
(a) Average revenue and marginal revenue remains constant at all levels
of output and AR and MR curves are parallel to ox-axis.
(b) Total revenue increases at constant rate and TR curve is positively
sloped straight line passing through the origin.
q Behaviour of TR, AR and MR when price falls with additional unit of output
sold or there is monopoly or monopolistic competition in the market
(a) Average revenue and marginal revenue curves have negative slope.
MR curve lies below AR curve.
(b) Marginal revenue falls, twice the rate of average revenue.
(c) So long as marginal revenue is positive, total revenue increases. When
marginal revenue is zero, total revenue is maximum and when marginal
revenue becomes negative, TR starts falling.
q Concept of Producer?s Equilibrium : If refers the stage where producer
getting maximum profit.
(A) MR and MC Approach : Conditions of producers equilibrium according to
this approach are :
(a) Equality between MR and MC
(b) MC curve should cut the MR curve from below at the point of equilibrium.
Or
MC should be more than MR after the equilibrium point, with increase in
output.
q Supply : Refers to the amount of the commodity that a firm or seller is
willing to offer or to sell in a given period of time at various prices.
Page 5


26 XII ?  Economics
AK
UNIT 3
PRODUCTION BEHAVIOUR AND
SUPPLY
POINTS TO REMEMBER
q Total production refers to the sum total of production done by using all units
of variable factors over a given period of time.
q Average production is the per unit output of variable factor (labour) employed.
AP = 
TP
variable input
q Marginal product is addition to total product resulting from employing one
additional unit of variable input.
q Returns to a factor : In a short period when additional units of variable
factors are employed with given fixed factors, then returns to a factor
operates. Returns to a factor shows the changes in total products, marginal
product which arises due to change in ratio between fixed and variable
factor. They are as follows :
(A) Increasing returns to a factor : In the initial stage as more and
more units of variable factor are employed with fixed factor total physical
production increases at increasing rate.
(B) Diminishing returns to a factor : As more and more units of variable
factors are employed with fixed factors, then total product increases at
diminishing rate.
(C) Negative returns to a factor : This is the last stage of returns to a
factor. As more and more units of variable factors are employed with
given fixed factors, total production starts decreasing and marginal
product becomes negative.
Relation between Total, Average and Marginal Product
1. So long as marginal product rises, total product increases at increasing
rate.
27 XII ?  Economics
AK
2. Marginal product starts falling but remains positive, total product rises
at diminishing rate in this stage.
3. When marginal product becomes negative, then total product starts
falling in this stage.
4. So long as average production is less than marginal product, average
production increases Marginal product intersects average product at
the point where average product is maximum. After this average product
starts falling and is more than marginal product in this stage.
q Cost : Cost is the sum of direct (explicit cost) and indirect cost (implicit
cost).
q Those monetary payments, which are incurred by producers for payment
those of factor and non-factor inputs which are not owned by produces are
called Direct Cost.
q Implicit cost is the cost of self owned resources of the production used in
production process.
q Total cost is the sum of total fixed cost and total variable cost.
TC = TFC + TVC  or TC = AC X Q
q Total fixed cost remains constant at all levels of output. It is not zero even
at zero output level. Therefore, TFC curve is parallel to OX-axis.
TFC = TC ? TVC or TFC = AFC × Q
q Total variable cost is the cost which vary with the quantity of output produced.
It is zero at zero level of output. TVC curve is parallel to TC curve.
TVC = TC ? TFC  or TVC = AVC × Q
q Average cost is per unit of total cost. It is the sum of average fixed cost and
average variable cost.
AC = 
TC
Q
  or AC = AFC + AVC
28 XII ?  Economics
AK
q Average fixed cost is per unit of total fixed cost.
AFC = 
TFC
Q
 or AFC = AC ? AVC
q Per unit of total variable cost is called average variable cost.
AVC = 
TVC
Q
 or  AVC = AC ? AFC
q Net increase in cost for producing one additional unit is called marginal
cost.
MC
n 
= TVC
n
 ? TVC
n?1
 or MC = 
TVC
Q
D
D
Relation Between Short-Term Costs
q Total cost curve and total variable cost curve remains parallel to each
other. The vertical distance between these two curves is equal to total fixed
cost.
q TFC curve remains parallel to X aixs and TVC curve remains parallel to TC
curve.
q With increase in level of output, the vertical distance between AFC curve
and AC curve goes on increasing. On contrary the vertical distance between
AC curve and AVC curve goes on decreasing but these two curves never
intersect because average fixed cost is never zero.
q Marginal cost curve intersects average cost curve and average variable
cost curve at their minimum point. After the point of intersection with increase
in output, AC curve and AVC curve starts rising.
q MC curve remains under the AC and AVC curve before inter section point
but after inter section point AC and AVC curve remains under the MC curve.
q Average cost and average variable cost falls till they are more than marginal
cost. When these two costs are less than marginal cost, in that situation
both (AC and AVC) rise.
q Money received from the sale of product is called revenue.
q Total revenue is the amount received from the sale of given units of a
commodity over a particular period of time.
TR = AR × Q  or  TR= SMR
29 XII ?  Economics
AK
q Per unit revenue received from the sale of given units of a commodity is
called average revenue. Average revenue is equal to price.
AR = 
TR
Q
 or  
P Q
Q
´
 = P = Price.
q Marginal revenue is net addition to total revenue when one additional unit
of output is sold.
MR = 
TR
Q
D
D
q Behaviour of TR, AR and MR when per unit price remains constant or firm
can sell additional quantity of a good at same price
(a) Average revenue and marginal revenue remains constant at all levels
of output and AR and MR curves are parallel to ox-axis.
(b) Total revenue increases at constant rate and TR curve is positively
sloped straight line passing through the origin.
q Behaviour of TR, AR and MR when price falls with additional unit of output
sold or there is monopoly or monopolistic competition in the market
(a) Average revenue and marginal revenue curves have negative slope.
MR curve lies below AR curve.
(b) Marginal revenue falls, twice the rate of average revenue.
(c) So long as marginal revenue is positive, total revenue increases. When
marginal revenue is zero, total revenue is maximum and when marginal
revenue becomes negative, TR starts falling.
q Concept of Producer?s Equilibrium : If refers the stage where producer
getting maximum profit.
(A) MR and MC Approach : Conditions of producers equilibrium according to
this approach are :
(a) Equality between MR and MC
(b) MC curve should cut the MR curve from below at the point of equilibrium.
Or
MC should be more than MR after the equilibrium point, with increase in
output.
q Supply : Refers to the amount of the commodity that a firm or seller is
willing to offer or to sell in a given period of time at various prices.
30 XII ?  Economics
AK
q Individual Supply : Refers to quantity of a commodity that an individual
firm is willing and able to offer for sale at each possible price during a given
period of time.
q Stock : Refers to the total quantity of a particular commodity available with
the firm at a particular point of time.
q Supply Schedule : Refers to a tabular presentation which shows various
quantities of a commodity that a producer is willing to supply at different
prices, during a given period of time.
Supply curve : Refers to the graphical representation of supply schedule
which represents various quantities of a commodity that a producer is
willing to supply at different prices during given period of time.
q Law of Supply : States the direct relationship between price and quantity
supplied, keeping other factors constant.
Exceptions to Law of Supply
1. Future Expectation
2. Agricultural goods
3. Perishable goods
4. Rare goods
5. Backward countries.
q Price Elasticity of Supply : Refer to the degree of responsiveness of
supply of a commodity with reference to a change in price of such commodity.
It is always positive due to direct relationship between price and quantity
supplied.
Price Elasticity of Supply (Es) =  
Percentage change in quantity supplied
Percentage change in price
q Methods for measuring price elasticity of supply :
1. Percentage Method 2. Geometric Method
q Degrees of Elasticity of Supply :
(a) If the tangent to the supply curve passes through the point of origin,
Es at that point is equal to unity.
(b) If the tangent intersects the x-axis, Es at that point is less than unity
(c) if tangent intersects the y-axis Es at that point will be greater than
unity.
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