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Production Theory - 4

This document provides an overview of production theory including concepts like production function, total product, average product, marginal product, law of diminishing returns, returns to scale, and stages of returns. It explains how inputs are transformed into outputs and factors that affect production levels.

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18 views

Production Theory - 4

This document provides an overview of production theory including concepts like production function, total product, average product, marginal product, law of diminishing returns, returns to scale, and stages of returns. It explains how inputs are transformed into outputs and factors that affect production levels.

Uploaded by

smrutisikha.patnaik.23mb
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Production theory

Provides framework for


economics of production of
firm
What is production
Production refers to transformation of
inputs or resources into outputs of goods
and services

Inputs = resources used in production of


goods (fixed and variable)
Output = end result
Basic production decision
1.How much of commodity to produce
2.How much inputs should be used

To answer these questions, the firm


a. Requires engineering data on production
possibilities
b. Economic data on input and output prices
Production function
Production is a function that transforms
inputs into output
Q = f (L, N, K……T)

Factors affecting production are


1.Technology
2.Inputs (land, labour etc)
3.Time period (short run vz long run)
Production function with one variable
input

1) Total Product: TP = Q = f(L)


TP
2) Average Product: APL =
L
ΔTP
3) Marginal Product: MPL =
ΔL
4) Production or MPL
Output Elasticity: EL = AP
L
Concepts of production
Total Product :This is amount of total
output produced by a given amount of
factor, other factors held constant.
Average Product: This is total output
produced per unit of factor employed
AP =TP/no. of units of factor employed

Marginal Product: This is addition to total


production by employment of extra unit of
factor
Law of variable proportions or law of
diminishing returns
As more and more of one factor input is
employed, all other input quantities held
constant, a point will be reached where
additional quantities of varying input will
yield diminishing marginal contribution to
total product
Short run law
Some factors fixed, other factors variable
State of technology fixed and unchanged
Possibility of varying proportion of factors
Production function with one variable
input
Total, Marginal, and Average Product of Labor, and Output Elasticity
Production function with one variable
input
Stages of return
Stage 1:Increasing returns. MP increasing,
AP increasing, TP increases till G at
increasing rate, after that at decreasing
rate. G= point of inflexion
Stage 2:Diminishing returns. MP decreasing
and falls till zero, AP decreasing, TP
increases at a decreasing rate
Stage 3:Negative returns. MP negative, AP
decreasing, TP is also falling
Contd..
Stage of operations –stage2
Stage 1 – fixed factor too much for
variable factor. Fixed factor is more
intensively utilised
Stage 3- variable factor too much in
relation to fixed factor

Applications – agriculture, studying


Returns to Scale- Change in all inputs

Production Function Q = f(L, K)

λQ = f(hL, hK)

If λ = h, then f has constant returns to scale.


If λ > h, then f has increasing returns to scale.
If λ < h, the f has decreasing returns to scale.
Stages of return – Returns to scale
The percentage increase in output when all inputs
vary in same proportion is known as returns to
scale
1.Constant returns to scale – Output increases in
same proportion as increase in input
2.Increasing returns to scale-Output increases by
greater proportion as increase in input
3. Decreasing returns to scale – Output increases
by lesser proportion as increase in input
Returns to Scale
Constant Increasing Decreasing
Returns to Returns to Returns to
Scale Scale Scale
Reasons
Causes of increasing returns
Specialisation in large scale production. In
some industries, small scale production is
not possible

Causes of decreasing returns


Coordination and control maybe difficult.
Information maybe lost or distorted when
transmitted

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