Theory of Production

Theory of Production: Theory of production and cost analysis in also important for the smooth functioning of production process and for project planning. To earn a certain level of profit, certain amount of goods has to be produced and to obtain such production; some costs have to be incurred. The problem confronting management in this context is to determine the level of production at which average cost of production may be least.
Production theory explains how average and marginal costs change with the change in production. Under what conditions do the costs increase or decrease? How does total production increase when input of one of the factors of production is increased keeping other factor’s constant? How optimum size of production can be obtained? Thus, production theory helps in determining the size of the firm and the level production.
Theory of Exchange or Prince Theory: Pricing is an important area of managerial economics. The success of a business and industrial firm largely depends upon the accuracy and correctness of price decisions taken by it. Price policy affects the demand of products to a great extent. It includes the determination of prices under different market conditions, pricing policies, pricing methods, differential pricing, product line pricing and price forecasting.