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Production Function

1) A production function shows the relationship between inputs and output for a given technology. In the short run, output can be changed by varying variable inputs, while in the long run all inputs can be varied. 2) Variable inputs can be changed in the short run, like raw materials and labor, while fixed inputs cannot change, like buildings and equipment. 3) The law of variable proportions states that as variable inputs increase initially, marginal product rises until an optimal point, after which it declines due to issues like diminishing returns to fixed inputs and lack of substitution between inputs.

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43 views

Production Function

1) A production function shows the relationship between inputs and output for a given technology. In the short run, output can be changed by varying variable inputs, while in the long run all inputs can be varied. 2) Variable inputs can be changed in the short run, like raw materials and labor, while fixed inputs cannot change, like buildings and equipment. 3) The law of variable proportions states that as variable inputs increase initially, marginal product rises until an optimal point, after which it declines due to issues like diminishing returns to fixed inputs and lack of substitution between inputs.

Uploaded by

kim795666
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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PRODUCTION FUNCTION

Production function refers to the functional relationship


between inputs and output for a given state of technology.
Symbolically: Ox = f (i1, i2, i3 …in)

SHORT RUN AND LONG RUN


The functional relationship between change in output due to
change in inputs is studied in two phases: Short run and long run time
periods

Short Run
Short run refers to a period in which output can be changed by
changing only variable factors.

Long Run
Long run refers to a period in which output can be changed by
changing all factors of production.
Variable Factors
Variable Factors refer to those factors, which can be changed in
the short run. A variable factor is the one, whose quantity can be
changed to change the output. The quantity of such factors increases
with rise in output and decreases with fall in output. For example, raw
material, casual labour, power, fuel, etc. Variable factors vary directly
with the level of output.

Fixed Factors
Fixed factors refer to those factors, which cannot be changed in
the short run. The quantity of fixed factors remain the same in the short
run irrespective of level of output, i.e. they do not change, whether the
level of output rises, falls or becomes zero. For example, plant and
machinery, building, land, etc.
Short Run Production Function (Variable Proportion)

It studies the effect on output, due to change in variable


input, assuming no change in other factors. As there is change in
variable input only, the ratio between different inputs tends to
change at different levels of output. This relationship is
explained by the 'Law of Variable Proportions’

Long Run Production Function (Constant Proportion)

It studies the effect on output, due to change in all the


factor inputs. As all inputs are variable in the long run, the ratio
between different inputs tends to remain the same at different
levels of output. This relationship is explained by the
'Law of Returns to Scale'
CONCEPT OF PRODUCT
Product or output refers to the volume of goods produced by a
firm or an industry during a specified period of time. The concept
of product can be looked at from three different angles:
(i) Total Product (ii) Marginal Product (iii) Average Product
Total Product (TP)
Total product refers to total quantity of goods produced by a firm
during a given period of time with given number of inputs. For
example, if 10 labours produce 60 kg of rice, then total product is
60 kg. Total Product is also known as Total Physical Product
(TPP), or Total Return or Total Output.
Average Product (AP)
Average product refers to output per unit of variable input.
For example, if total product (TP) is 60 kg of rice, produced by
10 labours (variable input), then average product will be 60 / 10 =
6 kg. AP is obtained by dividing TP by units of variable factor.
Marginal Product (MP)
Marginal product refers to addition to total product, when
one more unit of variable factor is employed.
or MP = Δ TP/ Δ N
THE LAW OF VARIABLE PROPORTIONS
The law of variable proportions states that with the
increase in a variable factor keeping other factors constant,
initially the marginal product rises but after reaching a certain
level of employment it starts declining.
Assumptions of law
(i) Technique of production does not change. The law does not
apply if there is improvement in technology.
(ii) All units of variable factor are equally efficient.
(iii) Factors of production cannot be fully substituted.
(iv) There must be some inputs whose quantity is kept fixed.
(v) The law does not apply to those cases where the factors must
be used in fixed proportions to yield a product.
Fixed Variable Total Product Marginal
Factor Factor (in units) product
(Land) (Labour) (in units)
1 1 2 2
1 2 6 4
1 3 12 6
1 4 16 4
1 5 18 2
1 6 18 0
1 7 16 -2
Reasons behind Increasing Returns to a Factor
The reasons for increasing returns to a variable factor are:

i. Underutilization of fixed factor


The fixed factor, land, is underutilised in relation to
labour employed on it. This helps in better utilisation of the
fixed factor. It results in increasing returns.
ii. Indivisibility of factors
The factors employed in the production process are
indivisible, i.e., they cannot be divided into smaller parts.
Thus, when more units of the variable factor are combined
with the fixed factor, returns are increasing.
iii. Specialisation and division of labour
As the number of labourers is increased,
specialisation and division of labour will lead to increasing
returns.
iv. Better Co-ordination between the factors
The reasons for diminishing returns to a factor

i. Optimum use of fixed factor


Returns start diminishing when the fixed factor is fully
utilized in relation to labour employed on it.
In other words, the quantity of fixed factor is just right in
relation to the quantity of the variable factor.
ii. Lack of perfect substitutes between factors
All factors of production are in scarce supply. When
there is an imperfect substitute of a factor with another factor,
returns start diminishing.
iii. Poor Co-ordination between the factors
Continuous increasing application of the variable factor
along with fixed factors beyond a point crosses the limit of ideal
factor – ratio.
This results in poor co – ordination between the fixed &
variable factors.
Postponement of the Law
The law of variable proportion can be postponed if :

i. Improvement in technology takes place


It means that for some time due to improvement in
the technology of production the law becomes inoperative.

ii. Some substitutes of the fixed factor are discovered


It means that all factors have become variable.
The law will become inoperative till the newly discovered
substitute factors are used.
RELATIONSHIP BETWEEN TP AND MP

1. As long as TP increases at increasing rate, MP also


increases.
2. When TP increases at diminishing rate, MP decreases.
3. When TP reaches its maximum point, MP becomes zero.
4. When TP starts decreasing, MP becomes negative.
RELATIONSHIP BETWEEN AP AND MP
1. As long as MP is more than AP, AP rises.
2. When MP is equal to AP, AP is at its maximum.
3. When MP is less than AP, AP falls.
4. Thereafter, both AP and MP fall, but MP becomes
negative, whereas, AP remains positive.
Important Questions for Assignment

1. Explain the reasons for increasing returns to a factor.


2. Define production function.
3. Give meaning of MPP
4. Identify the three phase of the law of variables propor.
from the following & also give reason behind each phase.
Units of 1 2 3 4 5
Var. Factors
T.P.P. 10 22 30 35 30
5. Explain the law of returns of a factor with the help of
total product and marginal product schedule.
6. State the given statement is true or false. Give reasons
for your answer:
(a) Total Product always increases whether there is
increasing returns or diminishing returns to a factor.

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