Economics

• Stage 2


  1. Caused by intermediate stage of diminishing average returns

  2. MP is less than AP but MP is positive

  3. TP continues to increase at diminishing rate, reaches maximum and then starts diminishing

  4. AP continues to increase at diminishing rate, reaches maximum and then starts diminishing

  5. MP continues to diminish and becomes zero

  6. AP reaches maximum when equal to MP before declining continuously

  7. This is the efficient stage of production where resources are utilized optimally
• Stage 3


  1. Terminal stage of negative marginal returns

  2. TP declines

  3. MP is negative

  4. AP continues to diminish

  5. Inefficient stage of production as less output is produced with more input

  6. Indicates inefficiencies in the use of production inputs
• Isoquant


  Curve representing equal quantity, different combinations of inputs (labour and capital) that yield the same level of output
• Isoquants


  • Negatively sloped, convex to the origin
  • The rate at which one factor of production is substituted for another (marginal rate of technical substitution) tends to fall, indicating diminishing marginal productivity of the increasing input
• Marginal rate of technical substitution (MRTS)


  The ratio of the marginal products of the two inputs, representing the slope of the isoquant
• Isoquants cannot intersect or touch each other
• Optimization is achieved where the isocost line is tangential to the isoquant, representing the least-cost combination of inputs to produce a given output
• Explicit cost


  Actual expenditure outlays of the firm, including costs of raw materials, rent, capital equipment, etc.
• Implicit cost


  Opportunity cost of the firm's own resources used in production, such as the value of the entrepreneur's own labour and the firm's own capital
• Types of cost


  • Private cost
  • Social cost
  • Economic cost
  • Accounting cost
  • Historical cost
  • Replacement cost
  • Sunk cost
  • Incremental cost
• Private cost includes explicit and implicit costs incurred by the firm in production
• Social cost includes private cost plus external costs borne by society
• Economic cost considers both explicit and implicit costs, while accounting cost only considers explicit costs
• Historical cost is the past acquisition cost of an asset, while replacement cost is the current cost to replace the same asset
• Sunk cost is an expenditure that cannot be recovered, while incremental cost is the change in total cost for implementing a particular management decision