Production
Production
Production
Introduction
• Production refer to an economic term to describe the inputs that are used
in producing the goods or services in the attempt to make an economic
profit.
Input-> Process (Production)-> Output
b= Q
L
Assumptions for short run
production
Q = f(L, K)
K Q
6 10 24 31 36 40 39
5 12 28 36 40 42 40
4 12 28 36 40 40 36
3 10 23 33 36 36 33
2 7 18 28 30 30 28
1 3 8 12 14 14 12
1 2 3 4 5 6 L
Total Product TP = Q = f(L)
Average Product Q
APL =
L
Marginal Product Q
MPL = L
• MP is change in total production, when we increase one worker,
eg: from 3 workers now we have 4.
Production or MPL
EL =
Output Elasticity APL
Practice
• Calculate Total, Marginal, and Average Product of Labor, and Output
Elasticity for following Labor and Output.
S. No L Q
1 1 3
2 2 8
3 3 12
4 4 14
5 5 14
6 6 12
L Q MPL APL EL
0 0 - - -
1 3 3 3 1
2 8 5 4 1.25
3 12 4 4 1
4 14 2 3.5 0.57
5 14 0 2.8 0
6 12 -2 2 -1
Laws of Production
Two laws of production:
1.Law of Variable proportion (Short run)
Q=f(L)
Considering L=9, MRP= 480<MW. This will add to cost and the
company will incur losses.
Law of Return to Scale (Long run)
L K Q
10 10 100
20 20 240
30 30 330
Constant Returns to Scale
• When increase in input is proportionate to
increase in output, it exhibits constant returns to
scale.
L K Q
10 10 100
20 20 200
30 30 300
Diminishing Returns to Scale
• When a proportionate increase in inputs, K & L,
leads to a less than proportionate increase in
output.
L K Q
10 10 100
20 20 180
30 30 250
Q=f(L,K)
If there is an increase in the input by ‘h’ times let the output may
increase by ‘k’ times.
kQ=f (hL,hK)
If h<k, this indicates increasing returns to scale
h=k, this indicates constant returns to scale
h>k, this indicates diminshing returns to scale
Optimal Input Combination or Least Cost
Combination
• For Calculating the cost, price of each input must be known.
• Budget or Expenditure of a firm =
(units of labour* price of labour)+ (units of capital*price of capital)
E= L*PL + K*PK
Also MRTS (Marginal rate of Technical Substitution) = (MPL/ MPK) = (PL/PK)
Economies and Diseconomies of Scale
Economies of Scale occurs where factors of production are
perfectly divisible. And technology is such that labor- capital
ratio is fixed.
• When the factors of production are perfectly divisible, showing
constant returns to scale.
Diseconomies of Scale:
The diminishing return to management, that is managerial
economies.
• As the size of the firms expands, managerial efficiency
decreases.
• Limitedness or exhaustibility of the natural resources.
• Eg: doubling of coal mining plant may double the coal output because of
limitedness of coal deposits.