Producer Behaviour and Supply Class 11 Notes

The production function states the maximum output obtainable from given amounts of inputs. In the short run one input, typically labour, varies while the others stay fixed, and the output totals, marginal and average are read from the function.Total product is the total output from all units of the variable input; average product is output per unit of input; marginal product is the addition to total product from one more unit of the input.The three products trace the shape of the law of variable proportions: MP first rises, then falls, passes zero and turns negative, and AP follows MP.

In the short run, as units of the variable input are added to fixed factors, marginal product at first rises, then falls, then turns negative. The three phases are increasing returns (phase I), diminishing returns (phase II) and negative returns (phase III). The law is also called the law of diminishing returns or the law of variable proportions.Phase II, diminishing returns, is the normal range of production because the fixed factor becomes scarce per unit of the variable input.

• Phase I, increasing returns: MP rises — better division of labour and fuller utilisation of the fixed factor.
• Phase II, diminishing returns: MP falls but stays positive — the fixed factor is now crowded by the variable input.
• Phase III, negative returns: MP turns negative — total product falls as extra units are applied.
• All three phases combine in one law; the producer operates in phase II, where diminishing returns rule.
• Short run versus long run: returns to a factor occur in the short run; returns to scale occur in the long run when all inputs vary.

Total cost is the money value of all inputs used to produce a given output. It splits into total fixed cost, which does not change with output — rent, salaries, interest on borrowed capital — and total variable cost, which changes with output — raw material, power, wages of casual labour. TC = TFC + TVC, and TFC is constant while TVC rises with output.

Average cost is total cost per unit and splits into average fixed cost and average variable cost; marginal cost is the addition to total cost from producing one more unit. AFC falls continuously as output rises, AVC and AC are U-shaped, and MC is the hinge that cuts both at their minimums. MC uses only the variable cost, since adding one unit changes variable, not fixed, cost.

• AC = AFC + AVC at every output.
• AFC falls continuously and is a rectangular hyperbola because TFC ÷ Q shrinks as Q grows.
• AVC and AC are U-shaped in the short run with the law of variable proportions.
• MC is the change in TVC as well as in TC, since fixed cost does not move. MC = TVC of the nth unit.
• MC cuts AC and AVC at their minimums; when MC is below them they fall, when above they rise.

Revenue is the money the firm receives for its output. Total revenue is price times quantity. Average revenue is revenue per unit, which is the price, and marginal revenue is the addition to total revenue from selling one more unit. In perfect competition the price is fixed, so AR is constant and equals MR; in other markets AR falls and MR lies below it.

The producer maximises profit where marginal revenue equals marginal cost and MC is rising. Before that point MR exceeds MC, so each extra unit adds to profit; past the point MC exceeds MR, so each extra unit eats into profit. The rising-MC condition picks the profit-maximising crossing out of the two points where MR and MC meet.

Supply is the quantity of a good that a producer is willing and able to offer at a given price over a period. The law of supply states that quantity supplied rises with price, other things remaining the same, so the supply curve slopes upward. A change in price moves along the curve; a change in any other determinant shifts it.Price elasticity of supply is the responsiveness of quantity supplied to a change in price, computed like the demand elasticity but from the supply schedule.

• Determinants of supply: the price of the good, the price of inputs, technology, the producer's objective, the number of firms and the expectations of the future.
• Movement along the supply curve: a change in the good's own price.
• Shift of the supply curve: a change in input prices, technology, expectations or the number of firms.
• Perfectly elastic (E = ∞), highly elastic (E > 1), unitary (E = 1), inelastic (E < 1) and perfectly inelastic (E = 0) — the same five degrees as demand.
• Geometric method: at a point on a straight-line supply curve, E = upper segment ÷ lower segment.

The unit is examined through the curves, the equilibrium condition and the elasticity computation. Every answer should be ready to draw a labelled diagram of the cost and revenue curves and to compute the products, costs and elasticities from a small table.

• Define production function, TP, AP, MP, TFC, TVC, TC, AFC, AVC, AC, MC, TR, AR, MR, supply and the law of supply.
• State the law of variable proportions with its three phases and assumptions.
• Draw the TP-AP-MP diagram and the TC-TFC-TVC diagram and the U-shaped AC-MC diagram with the cuts at the minimums.
• State and explain the MR = MC equilibrium with the rising-MC qualifier.
• Distinguish returns to a factor from returns to scale.
• Compute AP, MP, the average costs, MC, AR, MR and the price elasticity of supply from the given schedules.