1. Production Theory
A2 Economics
Unit 3

2. Aims & Objectives Aim: Understand productive efficiency. Objectives:
Define productive efficiency
Explain the difference between firms costs
Analyse the relationship between firms costs

3. Starter Define fixed, variable and total costs.
Define marginal product.
Define increasing marginal returns.
Define law of diminishing returns.

4. Optimal Output
No. of Workers
Total Product
Average Product
Marginal Product 1 3 3   3 2 7
 3.5  4 16
 5.3  9 4 28  7
 12 5 45
 17 6 60
 10
 15 63
Increasing Marginal Returns
Diminishing Marginal Returns
The ideal combination of fixed and variable factors to produce the lowest average cost.

5. Productive Efficiency
When a firm operates at minimum average total costs, producing the maximum possible output from inputs in the production process.
Firm operates at minimum average costs.

6. Increasing and Decreasing SR Costs
Diminishing SR Costs
Increasing SR Costs
Costs MC
ATC
6 Workers
No. Of Workers

7. Fixed, Variable and Semi-Variable
Fixed Costs
Variable Costs
Semi-Variable Costs (both fixed and variable elements)
e.g. Landline telephone
In groups categorise examples of the above costs.

8. Average Costs Average Fixed Costs:
Total fixed costs divided by the number produced.
Average Variable Costs:
Total variable costs divided by the number produced.
Average Total Costs:
Total cost divided by the number produced.
Marginal Cost:
The cost of the extra unit of output.

9. From Table - Worksheet
Costs £s MC
ATC
AVC
AFC
Output

10. Diagram Relationships
AFC falls rapidly as output rises as FC spread over many units.
Falling AFC pulls MC down.
BUT the firm will be taking on labour and, after some point, the falling FC will be unable to compensate for the increased labour cost and MC will increase.
MC curve cuts the AC curves at their lowest point.

11. Activity Activity: Calculate the firms costs and complete the table.
Plot the average and marginal cost curves on graph paper. (plot the marginal values midway between the units of output 0.5 to 5.5.
At what level of output is the firm productively efficient?
Explain why productive efficiency occurs at this level of output.

12. Total Fixed Costs (TFC) Total Variable Costs (TVC) Total Costs (FC+VC)
Qty / Output
Total Fixed Costs (TFC)
Total Variable Costs (TVC)
Total Costs (FC+VC)
Average Fixed Costs (AFC)
Average Variable Costs (AVC)
Average Total Costs (ATC)
Marginal Costs (MC) 70 1
120 2
150 3
175 4
222 5
295 6
400

13. Plenary Give an example of a fixed, variable and semi-variable cost.
Define productive efficiency.
Explain what marginal costs are.