Theory of Production (1) - 3
Theory of Production (1) - 3
inputs
Fixed inputs ❑ Examples:- Building, Land
etc
❑ ( In the long run fixed inputs are
❑ Remain the same in the
become varies)
short period .
❑ At any level of out put, the
amount is remain the
same.
❑ The cost of these inputs
are called Fixed Cost
Variable inputs
❑ In the long run all factors
of production are varies ❑ The cost of variable inputs
according to the volume of is called Variable Cost
outputs. ❑ Example:- Raw materials,
labour, etc
• Law of variable proportion: Short run
Production Function
The firm is not making the best possible use of the fixed factor.
So, the firm has an incentive to increase input until it crosses over
to stage II.
2 1 8 8
4 2 18 10 Increasing returns to scale
6 3 30 12
8 4 40 10
10 5 50 10 Constant returns to scale
12 6 60 10
14 7 68 8
16 8 74 6 Decreasing returns to scale
18 9 78 4
• Law of return to scales: Long run
Production Function
Increasing returns to scale Inputs increased 10% => output increased 15%
Constant returns to scale Inputs increased 10% => output increased 10%
Decreasing returns to scale Inputs increased 10% => output increased 8%
Increasing returns to scale Inputs increased 10% => output increased 15%
Constant returns to scale Inputs increased 10% => output increased 10%
A 20 1 100 unit
B 18 2 100 unit
C 12 3 100 unit
D 9 4 100 unit
E 6 5 100 unit
F 4 6 100 unit
Capital
Labour
Capital
Labour
The slop of isoquant is known as Marginal Rate of Technical Substitution (MRTS). It is the rate at
which one factors of production is substitute with other factor so that the level of the out put
remain the same.
MRTS = Changes in Labour / changes in capital
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Theory of Production