Important Questions for Class 12 Economics Chapter 3 – Production and Costs

1) Explain returns to a factor. Define the law of diminishing returns!

Ans – Returns to a factor depict the characteristics of the output regarding variations in one input factor while the others are kept constant. It’s a short-term concept. As per the rule of diminishing returns to a factor, since a variable factor is added to a fixed combination of other factors, the marginal product increases in peaks, falls after, and turns negative.

The law of diminishing returns is a fundamental concept of economics that has a focused part to play in production theory. Production theory is the concept of converting inputs into outputs in an economic process. Business analysts and finance-based loan providers might check the diminishing marginal returns to figure out if a production rise is beneficial.

2) Explain the Relationship between Marginal Cost and Average Variable Cost with a Diagram.

Ans – The overall relationship of marginal cost (MC) to average variable cost (AVC) is important for production economics. When MC is less than AVC, then AVC will decline. But, when MC exceeds AVC, the AVC will increase substantially. This normally means that AVC will be U-shaped, but fixed costs don’t form any part of AVC and MC calculations.

Marginal cost is how much more it costs to produce just one additional unit, but variable costs reflect materials and labor used for every unit in production. One usually assumes marginal cost at a desired quantity as the incremental cost linked with the last section of produced goods. Meanwhile, the marginal cost at any given quantity can be described as the incremental cost of the next set of concurrent units.

This direct distinctive factor becomes visibly irrelevant while considering marginal cost by implying a small variation in the overall quantity that has been produced. Based on the grade analogy, the average cost will decrease in the total quantity produced while the marginal cost is below the average cost and increase in quantity where the marginal cost is significantly much higher than the overall average cost.

The average cost will neither decrease nor increase while the marginal cost at any given quantity matches the average cost at that particular quantity. To elaborate with a live instance, assume that Mary makes a living as a baker, and she plans to expand her serving dishes apart from cakes & offer extensive confectionary variants like sandwiches and appealing bakery items.

She will consider whether she should do it by calculating the extra ingredients and labor cost for producing several sandwiches. The fixed and variable costs will make up the marginal cost of the sandwich. If her marginal cost of a sandwich is higher than the amount she can sell it to the customer, then her selling sandwiches will not profit at all.

3) The Determinants of Supply:

Ans – Supply is the amount of a good available for sale at a price over some period. It measures a firm’s willingness to sell rather than its sales, which may be above or below demand. Supply equals total output adjusted by inventory change.

The supply function can be written as:

S = f(Px, Pa……Pc, PL……PO, T, Cr, St, O, G)

where Px is the price of the product, Pa….Pc depicts prices of complements, PL….PO depicts input prices, T is time, St represents the state of technology, O stands for the firm’s objectives, and G represents taxes, subsidies, and regulations.

The following are some of the most significant factors that influence supply:

• Product cost
• Related goods price
• Total income of the consumers
• Consumer choices and preferences
• Ad expenses
• User expectations
• Demo effect
• Population of the nation
• Proper distribution of the country’s income

Here we have provided detailed insights for some of the above ones:

Production Costs: In a lot of private firms, more expensive inputs reduce the firm’s profit by restricting supply. Input prices, regular wages, service taxes, and government regulations affect production costs.

Technology: Increased technology modernization will reduce the costs of production by expanding supply with a great profit.

Number of Sellers: The more sellers present in the market; the more is the market supply.

Future Price Expectations: The producers may stock up on the goods at present and release their holdings in the future to land at higher prices and witness maximum profit.

NCERT Questions for Class 12 Economics Chapter 3 – Production and Costs

Production and costs are essential concepts in economics that play a significant role in determining the success of businesses. Understanding how production processes work and how costs are incurred is crucial for making informed business decisions. In NCERT Class 12, you will delve deeper into these concepts and learn about the various factors that influence production and costs.