Marginal rate of Technical substitution ( MRTS)

It is the rate at which a factor of production can be substituted for another at the margin without affecting any change in the quantity of output is known as the marginal rate of technical substitution (MRTS).

If there are two factors X and Y, then the quantity of Y for which one unit of X is a substitute, if the output remains unchanged.

Autonomous investment VS Induced investment.

Autonomous investment

It is an investment which is independent of the general economic situations. It is income inelastic. 

Induced Investment

It is an investment which is dependent on the general economic situations in the country, like general price level, national income, national consumption etc. It is income elastic.

Marginal rate of substitution

What is marginal rate of substitution?

 The indifference curve analysis is based on the principle of marginal rate of substitution.

 

It is the rate at which an individual will exchange successive units of one commodity for another.

For example, if a consumer has more of apples than oranges, then he will be willing to give more of oranges for an extra unit of 

apple.

It is the ratio between the marginal utilities of two commodities, which guides the consumer's choice. 

Production Function

Production Function

Is the relationship between the physical inputs and output of a firm is often referred to as the Production Function. 

The Production function shows for a given state of technological knowledge and managerial ability, the maximum rates of output that can be obtained from different combinations of the productive factors during a given period of time. 

Production Function is simply a catalouge of different output possibilities.

LAW OF VARIABLE PROPORTION

Law of Variable Proportions.

This law explains the effects on output of variations in factor - proportions.

It refers to the amount of extra output produced by adding to a fixed input more and more of variable input. 

There are three stages to the law,

Stage 1: Increasing Returns Stage. The output increases at an increasing rate.

Stage2: Diminishing Returns Stage. The output increases at a diminishing rate. 

Stage 3: Negative Returns Stage. The Total Product declines and the marginal product becomes negative cutting the x - axis.

This the Total Product, Marginal Product and Average Product pass through three different stages.

COST AND COST CURVES

The Fixed capital of the firm,eg, equipment, machinery, building etc. is part of the fixed cost. The cost that does not vary with the change in output is called FIXED COST. 

VARIABLE COST is the cost that varies with output. For eg. labour, raw materials, fuel, power. As the output increases the variable cost also increases.

Total cost= Total Fixed Cost+ Total Variable Cost.

OR

                     TC= TFC+ TVC

TFC is constant and this cost is born by the producer even if his production is zero. Therefore, this curve is parallel to x axis.

TVC is a rising curve because as the output increases there is more requirement for variable input. 

TC is the total of both TFC and TVC.

Theory of Production- Laws of Returns

Theory of Production- Laws of Returns.

In these laws the economic unit is the individual firm which tries to maximize it's producf-- output through a rational combination of the factors of production at its disposal.

The theory of production is divided into two heads : 1) laws of Returns and 2) Production Function.

Production

It is the result of the co-operative working of the various factors of production- land, labour, capital and entrepreneurship.

Marginal Revenue

Marginal Revenue is the change in total revenue resulting from an increase in sale by an additional unit of the product in a particular time. 

Average Revenue Curve

Average Revenue is the revenue per unit of the commodity sold. It can be calculated by dividing total revenue by the number of units sold to the customers.

Average Revenue= Total Revenue÷Number of units sold to the customers.

Consumer Surplus.

Consumer Surplus may be defined as the excess of utility obtained by the consumer over utility obtained by the consumer over utility forgone or disutility suffered.

It is measured by the difference between the maximum price which the consumer is willing to pay for a commodity rather than go without it and the price which he actually pays for it .

Marshall defined it as " The excess of price which a person would be willing to pay rather than go without the thing, over that which he actually does pay is the economic measure of this surplus of satisfaction. It may be called as

Consumer Surplus".