economics and business enviroment

Production

In common term,

• Conversation of physical inputs into physical output.

• To create something

In economic term,

• Convers resources, working upon them so satisfy

human wants.

• Creation of utilities in form of goods or services.

Factors or resources of production

• Land :- it nature gift, supply of land is

fixed.

• Labour :- mental and physical exertion

to production

• Capital :- man made instrument of

production.

• Entrepreneur :- mobilize above

factors & bear risk.

Production function

• Relationship between inputs & outputs

• Inputs (4 factors) == outputs (take form of volume)

• It uses mathematical terms like

• Q = f (factors) (a, b, c, d…………n)

Q stand for outputs, (a, b, c, d, ….n are factors or resources used)

• Short term function one of the inputs used & other remains

unchanged

• Long term function free to vary amount of all inputs used.

Assumption or estimation

• Technical knowledge

• Factors divides into viable units

• It require to uses best techniques

• It related to a particular unit of time

Cobb-Douglas production function

It applies not to an individual firm

but to whole of manufacturing firm in U.S.

Q = KLa C(1-a)

Contribution = Labor 3/4th, Capital 1/4th

Q = Output

L = Qty. of labor

C = Qty. of capital

K & a = positive

constant

Production with one and two variable inputs

Q = f (x, y)

q=output, x=labor, y=capital

• 2 unit of X & 2 unit of Y gives 18 outputs. (blue colour cell)

• Adding 1 unit to X (2+1) 3 & Y constant/same as i.e. 2 then

it gives 29 outputs. This is short term production function.

• Increase both X & Y by 1 i.e. 3 & 3 respectively then it

gives output of 4. this is long term production function.

Capital (Y) Output (quantity)

4 24 39 52 60

3 17 29 41 52

2 8 18 29 39

1 4 8 14 20

Labor (X) 1 2 3 4

Three Stages of production

Variable

input (X)

Total

product

(Q OR TP)

Marginal

product

(MP)

Average

product

(AP)

0 0 - 0

1 8 8 8

2 18 10 9

3 29 11 9.67

4 39 10 9.75

5 47 8 9.4

6 52 5 8.67

7 56 4 8

8 52 -4 6.5

Lets understand through example…..

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9

TOTAL PRODUCT

Variables

Ou

tpu

ts

Stage 1

Law of

Increasing return

Stage 2

Law of

diminishing

return

Stage 3

Law of negative

return

Total

Product

TP

-6

-4

-2

0

2

4

6

8

10

12

1 2 3 4 5 6 7 8 9

MP

AP

Variables

Stage 1

Law of

Increasing return

Stage 2

Law of

diminishing

return

Stage 3

Law of negative

return

Economy of scale

• In long run production organization gets benefits like low

cost and more output so in this case we can say that

company experiencing economic of scale.

• If in long run average cost is high but output is also high

then it is sign of diseconomies of scale.

• Two economies arise in long run production

1. Internal economies :- it occur to the firm when it

expands the outputs, cost reduce, place better in the market to

compete.

2. External economies :- benefits accruing to member

industries as a result of expansion of industries.

Law of variable proportions

• It examines the production function with one

factor variable, keep Qty. of other factor fixed.

• It refers to input-output relationship

(For example = input increase output increase)

• One input increase with other fixed input,

marginal physical productivity decline.

Input Product (Qty.)

1 8

2 18

7 56

8 52

-10

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9

TP

MP

AP

Variable

Ou

tpu

t

Law of return scale

• Behavior of output in response to change in scale.

• Change in scale means all factors are increase or decreased

in same proportion.

• It may be constant increase or decrease.

• If scale increase in given proportion then output increase

same proportion.

0

200

400

600

1 2 3 4 5

Constant

Labor

Ca

pit

al

• Increase scale proportion same

increase in output proportion.

• It is also called linear

homogeneous product function.

• Due to ……………..

0

200

400

600

1 2 3 4 5

Increase• Output increase greater

proportion than the increase in

inputs.

• Due to better management,

brand value, qualitative

product. Labor

Ca

pit

al

• Output increase smaller

proportion with an increase in

all inputs.

• Due to control, co-ordination,

difficulties in management, 0

200

400

600

1 2 3 4 5

Decrease

Labor

Ca

pit

al

Conclusion

Thank you….