Tuesday, May 5, 2020

Micro Economics Factors of Production

Question: Describe about the Micro Economics for the Factors of Production. Answer: 1: According to Khanna, Panigrahi Joshi (2016), economic profit is the term which indicates the difference between the aggregate output and total payments to factors of production. In specifically, economic profit = Y- (MPl. L) (MPK. K). Now, if Constant Returns to Scale (CRS) operate in the production process then there will be no economic profit as Y = MPl. L + MPK. K. However, the producers will earn an income as they supply capital. The income of the producer is called the rental of capital which is equal to MPK. K. Thus, accounting profit = economic profit and rental of capital. As a result, though the economic profit is zero, accounting profit is positive which is rental of capital. Thus, the grocery stores exist in the market though they do not earn economic profits. 2: In the words of Li et al., (2013), the term fixed overhead cost refers that type of costs which do not changes according to the changes of the output. These types of costs remain unchanged whether the business make profit or loss. In short, it remains the same no matter how much the output of the firm produces. Total income of the stuffs, rent of the office house, depreciation cost of the production and many more are the real life examples of fixed overhead cost. Thus, according to the problem, if the amount of fixed cost is $1000.00, then, the average fixed cost curve looks like the rectangular hyperbola. Thus by increasing the production, average fixed cost can be reduced which sometimes referred as spreading the overhead. Figure 1: Average Fixed Cost curve Source: (As created by author) Reference list: Khanna, K., Panigrahi, B. K., Joshi, A. (2016). Data integrity attack in smart grid: optimised attack to gain momentary economic profit.IET Generation, Transmission Distribution,10(16), 4032-4039. Li, Y., Yang, M., Chen, Y., Dai, Q., Liang, L. (2013). Allocating a fixed cost based on data envelopment analysis and satisfaction degree.Omega,41(1), 55-60.

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