Lecture 9 - Profit Maximisation (27/10/25)

The short run theory of production

Why not produce at every price level?

  • not profitable

  • Unfeasible - not enough land, RM, Capital

The law of diminishing returns - The law of diminishing returns states that when more units of a variable input (like labour) are added to fixed inputs (like machinery or land), the additional output gained from each extra unit will eventually start to fall.

Diminishing marginal returns refers to the point where adding an extra unit of a variable input (such as labour) to fixed inputs (like machinery or land) results in a smaller increase in output than before.

In short: keep adding, get less and less extra back.

The short run production function

  • Total physical product (TPP)

  • Average physical product (APP) —- APP = TPP/Qv

  • marginal physical product (MPP) —— change TPP / change Qv

Fixed costs - paid before you start producing

Variable costs - cost of production

Explicit cost v implicit cost

Explicit costs are the obvious, wallet-draining expenses. These are payments a business actually makes in cash.

For example: wages, rent, raw materials.

Implicit costs are the silent costs of opportunity. There’s no receipt, but value is still being given up.

For example: the income the owner could have earned working another job, or using owned property for something else.

Economics of scale - as you make more of a commodity, the cost of production becomes cheaper

  • Indivisibilities - some inputs must be used in large, fixed chunks rather than in small, flexible amounts, which can lead to unused capacity but also potential economies of scale as output grows.

Container principle - can only store a set amount of commodity

  • Greater efficacy of arge machines

  • By products

  • Multi stage production

  • Organisational and administrative economies

  • Financial economies

  • Economies of scope

Diseconomies of scale - as you make more of a commodity, the cost of production becomes more expensive

  • managerial complexity - relations between manager and workers

  • Alienation - repeating the same task over and over and over

  • Industrial relation problems

  • Disruptions if part of complex production chains fail

External economies and diseconomies of scale

Optimum combination of factors

  • simple two-factor case

  • if MPP./P. > MPP/P, costs can be produced by using more factor a and less factor b

costs minimised where:

MPP./P. = MPP/P.

multi-factor case

• costs minimised where:

MPP./P. = MPPJP... - MPP/P.

(the equi-marginal principle)

Long run average cost curves

Revenue

Revenue curves when firms are the price takers

Profit maximisation

Nice graphs and stuff I’m tired - comes back up on Wednesday