PRODUCTION

PRODUCTION
Production Function:
Production function can be defined as a technological relationship that tells the maximum
output producible from various combinations of inputs.
Q = f (K, L)
where
Q= Units of output
K= Units of Capital
L = Units of Labour
Types of Production Function

1. Short Run Production Function
It refers to the production function in which one factor is variable and other factors
are fixed. In short run, production can only be increased when more units of variable
factors are employed.
2. Long Run Production Function
It refers to production function in which all the factors can be changed i.e., in long
run there is no fixed factors, all factors are variable.
Factors of Production
1. Fixed Input
Fixed factors are those, the application of which does not change with the change in
output. e.g., Land, Capital
2. Variable Input
Variable factors are those, the application of which change with the change in
output. e.g., Labour
Concepts of product:
Total Product (TP) or Total Physical Product (TPP):

Total product is the total amount of a commodity produced by a given number of variable
inputs, keeping all other factors constant.
Total product can be estimated in two ways:
• As the summation of marginal product (MP) of various units of a variable factor
TP = ∑ MP
• As the average product (AP) multiplied by the number of units of a variable factor (L)
TP = AP X L
Average Product (AP) or Average Physical Product (APP)

Average product of a factor is the Total Product (TP) divided by the number of units of factor
(L).
AP = TPL
Marginal Product (MP) or Marginal Physical Product (MPP)
Marginal product is the change in total product resulting from the change in one unit of
variable input, keeping all other inputs constant.
MP = TPn – TPn-1
TPn = Total product produced by n units of variable input
TPn-1 = Total product produced by n -1 units of variable input
OR
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MP =
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ΔTP = Change in Total Product

ΔL = Change in one unit of variable factor
Relation between TP and MP
Diagram
• When TP increases at an increasing rate MP increases
• When TP increases at a diminishing rate MP declines but remains positive
• The point at which TP stops increasing at an increasing rate and starts increases at a
diminishing rate is called the point of inflexion. Corresponding to that point MP is
maximum
• When TP is at its maximum MP = 0
• When TP declines MP becomes negative
Relation Between AP and MP
Schedule:
Diagram:
Both AP and MP initially increase reaches to maximum and declines thereafter. AP can
never be 0 or negative whereas MP can decline to 0 and negative
• When MP > AP, AP increases

• When MP = AP, AP is at its maximum
• When MP < AP, AP decreases.

Law of Variable Proportion
Statement of the Law

When more and more units of variable factor is added to a given unit of fixed factor
TP initially increases at an increasing rate, then at a diminishing rate until it reaches
the maximum and declines thereafter.
Assumptions:
a) Techniques of production does not change
b) All units of variable factors are equally efficient or homogeneous.
c) Factors of production cannot be perfect substitute of each other.
d) Ratio in which factors of production are combined can be changed.
Explanation of the Law
Schedule
Diagram:
Phase I: TP increases at an increasing Rate: In this phase MP increases.
In the beginning the quantity of variable input is so small that fixed input cannot be
effectively utilised. As the number of worker (variable input) increases, each worker is
assigned a specialised task. This raises efficiency of the variable input. As the quantity of
variable increases more efficient utilisation of fixed input takes places. This raises MP of the
variable factor.
Phase II: TP increases at a diminishing rate: In this phase MP stats falling but remains
positive.
With the increase in the quantity of variable input, a pressure is now being felt on the fixed
inputs. This reduces MP of the variable input.
Phase III: TP starts falling: MP not only continue to fall but becomes negative.
It is because the quantity of the variable input becomes too large in relation to the quantity
of fixed inputs. This reduces the efficiency of the variable inputs so much that TP starts
falling and MP becomes negative
Reasons for Operation of Law of Variable Proportion
• Reasons for Increasing Returns to factor

a) Increase in Efficiency:
When the efficiency of fixed factor increases with the increase in the units of
variable factor, the stage of increasing returns operates.
b) Division of Labour:
If the increase in the units of labour brings greater division of labour and
specialisation in the production, it will also create the condition of increasing
returns.
c) Optimum Combination:
If to achieve the optimum combination of various factors of production, the
increases in the quantities of particular factor is required, it will also result in
increasing returns.
• Reasons for diminishing returns to factor:

a) Fixed factor:
The quantity of the fixed factor per unit of the variable factor falls as more and
more unit of the latter put to use, successive units of the variable input,
therefore, must add decreasing returns to the total output as they have less of
the fixed input to work with.
b) Imperfect Substitutes:
Factors of production cannot be perfectly substitute of each other.
c) Beyond Optimum combination:
There is an optimum combination of different factors of production that gives
the maximum output. When we increase a particular factor of production
beyond the optimum combination, marginal returns of that variable factor
decline.
• Reasons for negative returns to factor:
a) Poor co-ordination between fixed factor and variable factor:
When variable factor becomes too excessive in relation to fixed factor, then they
obstruct each other. It will ultimately lead to reduction in production i.e., TP will
fall and MP becomes negative.
b) Decrease in efficiency of variable factor:

With more and more increase in the variable factor beyond a certain point the
benefits of specialisation and division of labour start declining and it results in
inefficiencies of these variable factors.

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PRODUCTION

Types of Production Function

Total Product (TP) or Total Physical Product (TPP):

Average Product (AP) or Average Physical Product (APP)

ΔTP = Change in Total Product

Relation between TP and MP

• When TP increases at a diminishing rate MP declines but remains positive

• When TP declines MP becomes negative

Relation Between AP and MP

• When MP > AP, AP increases

• When MP < AP, AP decreases.

Statement of the Law

Explanation of the Law

Reasons for Operation of Law of Variable Proportion

• Reasons for Increasing Returns to factor

• Reasons for diminishing returns to factor:

b) Decrease in efficiency of variable factor:

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