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In economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production (including labor, capital, or land) and taxation .
The production function is a graphical or mathematical expression showing the relationship between the inputs used in production and the output achieved. Both graphical and mathematical expressions are presented and demonstrated. The production function is a simple description of the mechanism of income generation in production process.
the private or enterprise production price which forms the starting-point of the analysis in the first chapter. This price equals the cost-price and normal profit on production capital invested which applies to the new output of a specific enterprise when this output is sold by the enterprise (the "individual production price" [32]). The rate ...
The theory entails that there is a limit to how much one factor can be substituted for another. When production reaches a point where substitution between the factors becomes impossible (MP LK), the isoquant becomes positively sloping. No rational entrepreneur will operate at a point outside the ridge lines (Region of Economic Nonsense).
Price theory was a significant aspect of his legacy as a teacher, and he taught the subject from 1946 to 1964 and again from 1972 to 1976. Notable economists who took Friedman's price theory course include James M. Buchanan , Gary Becker , and Robert Lucas Jr. , all of whom later became Nobel laureates.
Hazlitt argues that this theory is flawed as it does not address how much workers need to buy back the product they create, and it can be detrimental to the economy. [3] Hazlitt believes that every increase in hourly wages, unless compensated by an equal increase in hourly productivity, is an increase in costs of production.
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The more variable costs used to increase production (and hence more total costs since TC=FC+VC), the more output generated. Marginal costs are the cost of producing one more unit of output. It is an increasing function due to the law of diminishing returns , which explains that is it more costly (in terms of labour and equipment) to produce ...