economics and business enviroment
TRANSCRIPT
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….