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Classical: Production Function

1. The document discusses various concepts related to production functions including factor-product relationships, factor-factor relationships, elasticity of production, isoquants, isocost lines, and opportunity cost. 2. Factor-factor relationships can include fixed proportions, substitutes, complements, and varying rates of substitution between inputs. Isoquants and isocost lines are used to determine least cost combinations of inputs. 3. Product-product relationships including joint, complementary, supplementary, and competitive products are also examined along with production possibility curves and revenue maximization. The principles of comparative advantage and equi-marginal returns are introduced.

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Omprakash Mishra
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672 views

Classical: Production Function

1. The document discusses various concepts related to production functions including factor-product relationships, factor-factor relationships, elasticity of production, isoquants, isocost lines, and opportunity cost. 2. Factor-factor relationships can include fixed proportions, substitutes, complements, and varying rates of substitution between inputs. Isoquants and isocost lines are used to determine least cost combinations of inputs. 3. Product-product relationships including joint, complementary, supplementary, and competitive products are also examined along with production possibility curves and revenue maximization. The principles of comparative advantage and equi-marginal returns are introduced.

Uploaded by

Omprakash Mishra
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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CLASSICAL

PRODUCTION FUNCTION
UNIT 2
Use of production function in decision-
making on a farm
Production and Organization Decisions

Administrative Decisions

Marketing Problem Decisions


Factor-Product Relationship
Determination of Optimum Input and
Output
Relationship between TPP &
MPP
Relationship between MPP &
APP
Elasticity of production
• The elasticity of production is a concept that measures the
degree of responsiveness between output and input.
Factor – Factor Relationship
• Factor-factor relationship is concerned with the
possibilities of substituting one input/factor (X1)
for another input/factor (X2) for producing a given
level of output.

• The two fold object of factor-factor relationship is


(i) Minimization of cost at a given level of output.
(ii) Optimization of output to the fixed factors
through alternatives resources combinations.
Isoquant (Iso-product curve)
• Various combinations of two inputs yielding the same
level of output.
• Each point on an isoquant represents the maximum
output that can be attained with these input combinations.
Types of Factor-Factor Relationship
Fixed proportion combination
• These represent such products that can be produced if
inputs are added in fixed proportion at all levels of
production. In this case there is no substitution between
inputs and thus there is strict complementarily between
the two inputs.

• Also called Leontief isoquants.

• e.g. One tractor and one driver.


• Substitutes: Two resources are said to be substitutes
when change in price of one leads to a change in demand
for another (MRTS is –ve).

• Complements: Resources used together in production.


When Price of X1 increases the demand for X2 decrease.
(MRTS is zero).
Constant rate of substitution
• Such type of a factor-factor relationship gives linear
isoquants.
• The substitution occurs at constant rate i.e. the amount of
one input replaced by the other input does not change as
the added input increases.
Varying Rate of substitution
• In this there can either be increasing rate or decreasing
rate of substitution.
Iso-cost line
• Locus of all possible combination of two inputs which can
be purchased with a given outlay or budget.
Computing Least cost combination:
Iso-cline
• line or curve connecting the isoquants of inputs for all
output levels is known as isocline.
Ridge lines
• Represent the points of maximum output from each input,
given a fixed amount of the other input.

• On the ridge lines MPP is zero.


Expansion Path
• the line or curve connecting the points of least cost
combination for different levels of output.

• Expansion path is an isocline on which slope of isoquant


• (MRTS) equals the slopes of isocost line (price ratio).

• The expansion path indicates the best way of producing


the different levels of output given the input prices & the
technology
• If expansion path is a straight line through origin, it means
inputs will be used in the same proportion at all output
levels and hence it is called scale line.

• It is curved; it implies the inputs will be used in various


proportions.
Product-Product Relationship
• What combination of enterprises should be produced.

• Algebraically, y1 = f (y2)
• Basic Relationship: The basic product-product
relationships are

• Joint Products- Joint products result from the same


production process and the production of one without the
other is not possible
• Complementary Products- Complementarity between
two enterprises exists when with a change in the level of
one, the other also changes in the same direction. Maize
after barseem.
• Supplementary products: Exists when increase or
decrease in one product does not affect the production
level of the other product

•.
• Competitiveness: This relationship holds when increase
or decrease in the production of one product affects the
production of other commodity inversely

• When two products are competitive, they may substitute


at constant rate, increasing rate or decreasing rate.
Constant Rate of Substitution
• It means that a unit change in one product is throughout
accompanied by the same unit opposite change in the
other product e.g. wheat & gram for land.
Increasing Rate of Substitution
• In this each unit increase in the level of one product is
accompanied by larger and larger decrease in the level of
other product.
Decreasing Rate of Substitution
• In this case a unit increase in the level of one product is
accompanied by lesser & lesser decrease in the level of
other product
Marginal Rate of Product
Substitution or Rate of Product
Transformation

RPT is nothing but the slope of production possibility


or opportunity curve.
PRODUCTION POSSIBILITY CURVE
(ISO-RESOURCE CURVE)
• The production possibility curve or product transformation
curve is the locus of maximum amounts of two products,
say Y1 and Y 2 that can be produced from a given
quantity of resources.
Iso Revenue Line
• It is the line which defines all possible combinations of two
commodities which would yield an equal revenue or
income.
Revenue Maximizing Combination of
Outputs
LAW OF EQUI-MARGINAL RETURNS
• A limited input should be allocated among alternative uses
in such a way that the marginal value products of the last
unit are equal in all its uses.
OPPORTUNITY COST
• Opportunity cost is defined as the returns that are
sacrificed from the next best alternative.

• Opportunity cost is also known as real cost or alternate


cost.
PRINCIPLE OF COMPARATIVE
ADVANTAGE
• Individuals or regions will tend to specialize in the
production of those commodities for which their resources
give them a relative or comparative advantage.
COST CONCEPT
Fixed cost

Variable cost

Total cost

Average fixed cost

Average variable cost

Average total cost

Marginal cost

Marginal revenue

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