KIRINYAGA UNIVERSITY
Theory of Production and Cost
, Introduction
QUANTITY (Q) = f(LABOUR, CAPITAL/LAND)
Q=f(L,K)
2
,Fundamental questions…
• How can production be optimized?
• How can cost be minimized?
• How does output behave when quantity of inputs
is increased?
• How can the least-cost combination of inputs be
achieved?
• What does happen to the rate of return when
more plants are added?
• How does technology matter in reducing the cost
of production?
3
, Why production and cost???
• Profit through managing the revenue is more
interesting and exciting.
• Managers may enjoy time spent on revenue
decisions.
• In a competitive market scenario;
– Profitability fairly depends on optimization of
production and minimization of costs.
– Managers may find internalization of profitability
is easier than externalization.
4
Theory of Production and Cost
, Introduction
QUANTITY (Q) = f(LABOUR, CAPITAL/LAND)
Q=f(L,K)
2
,Fundamental questions…
• How can production be optimized?
• How can cost be minimized?
• How does output behave when quantity of inputs
is increased?
• How can the least-cost combination of inputs be
achieved?
• What does happen to the rate of return when
more plants are added?
• How does technology matter in reducing the cost
of production?
3
, Why production and cost???
• Profit through managing the revenue is more
interesting and exciting.
• Managers may enjoy time spent on revenue
decisions.
• In a competitive market scenario;
– Profitability fairly depends on optimization of
production and minimization of costs.
– Managers may find internalization of profitability
is easier than externalization.
4
