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Practical 5 (4)

The document outlines the determination of the most profitable levels of input and output in farm production processes, emphasizing the importance of production costs for farmers. It explains various cost concepts, including total cost, average fixed costs, average variable costs, marginal cost, and the relationship between marginal cost and marginal revenue for optimizing output. Additionally, it discusses the optimum level of input, defined by the equality of marginal value product and marginal input cost.

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Anindya Sau
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10 views

Practical 5 (4)

The document outlines the determination of the most profitable levels of input and output in farm production processes, emphasizing the importance of production costs for farmers. It explains various cost concepts, including total cost, average fixed costs, average variable costs, marginal cost, and the relationship between marginal cost and marginal revenue for optimizing output. Additionally, it discusses the optimum level of input, defined by the equality of marginal value product and marginal input cost.

Uploaded by

Anindya Sau
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 16

To study determination of most

profitable level of input use in


a farm production
process

Practical no: 5
 Production costs play an important role in the decisions of
the farmers
 In general, at given level of prices, a farmer can increase his
farm income in two ways, i.e.,
 Most profitable level of output
 Most profitable level of input.
COST CONCEPTS
 Total cost
 Money value of all inputs used in the production process
 If the inputs used are represented by X1, X2,..., Xn and the
respective prices by Px1, Px2, ..., Pxn, then the total cost (TC)
can be expressed as:
TC = Px1.X1 + Px2.X2 + ... + Pxn Xn.
 Comprises of two components, i.e., fixed and variable costs
 Average Fixed Costs
 Average fixed costs, (AFC) are computed by dividing total fixed
costs by are amount of output. AFC varies depending on the
amount of production.
AFC=TFC/Y
 Average variable cost, AVC:
 It is computed by dividing total variable cost by the amount
of output.
 The shape of the AVC curve depends upon the shape of the
production function while AFC always has the same shape
regardless of the production function.
 Average Total Costs, ATC:
 can be computed in two ways
ATC = TC / Y. (or) ATC = AFC+AVC.
 Marginal Cost, MC :
 change in total cost per unit increase in output. It is the cost
of producing an additional unit of output. MC is computed
by dividing the change in total costs.
 Calculation of Marginal Cost

Quantity sold Total cost Marginal Cost


(units) (Rs.)

0 5 -

1 7 2

2 10 3

3 15 5

4 25 10
Task 1 : Complete the table (Send on lpulive)
(Time = 5 minutes)
Quantity sold Total cost Marginal Cost
(units) (Rs.)

0 4 -

2 15

4 24

7 34

10 48

15 55
Calculation of Marginal revenue

Quantity sold Total Revenue Marginal Revenue


(units) (Rs.)

0 10 -

1 14 4

2 20 6

3 30 10

4 50 20
Task 2 : Complete the table (Send on lpulive)
(Time = 5 minutes)

Quantity sold Total Revenue Marginal Revenue


(units) (Rs.)

0 0 -

2 12

4 18

7 25

10 40

15 60
Most profitable level of
output
Optimum level of output when
MC = MR
Task 3: Calculate Equilibrium Output (MC=MR)
(Time= 15 min.) Send on lpulive

Price (Rs.) Quantity Total Cost TR MR MC


sold (Q) (P*Q)
15 1 12
14 2 22
13 3 31
12 4 39
11 5 46
10 6 54
9 7 64
8 8 75
Calculation of MPP and APP

Average product = TP/input

= Y/X
Task 5 : Complete the table (Time = 5 minutes)

(3)
Most profitable level of input
 Optimum level of input
 MVP= MIC
 Where, MVP = Marginal value product
 MIC = Marginal input cost
Marginal input cost (MIC) is the cost of using an additional unit of
variable input; restated, it is the change in total cost due to using
additional units of variable input.
Task 6 : Calculate the optimum level of input
(Time = 20 minutes)

MIC

2
4
15
20
25
30
50
90
100
120

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