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PRODUCTIONPRODUCTION

FUNCTIONFUNCTION

MADE BY :

MishaNavreetIsha

RakhshitaPallavi

GMT III


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The theory of production consists of howthe producer, given the state of technologycombines various inputs to produce adefinite amount of output in an

economically efficient manner. Theory of production explains the relation

between input and outputs.

THEORY OF PRODUCTIONTHEORY OF PRODUCTION


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Production function refers to therelationship between the quantity of goodsproduced (output) and the factors ofproduction (inputs) necessary to produce it.It is a schedule that shows the highest levelof output a firm can produce from a givencombination of inputs.

Production function can be expressed as: Y=f(L,K,S) Where, Y= Production L= Labour K= Capital S= Land

THEORY OF PRODUCTIONTHEORY OF PRODUCTIONFUNCTIONFUNCTION


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Factors of production may be classified asfollows:

1. Fixed input- The quantity of which cannotbe changed in the short run as the level of

output changes e.g. Machinery, majorequipments, Buildings etc.

2. Variable input- The quantity of which maybe changed in the short run as the level ofoutput changes e.g. raw material andlabour services

3.

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION


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Law of variableLaw of variable

proportionproportion


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INTRODUCTIONINTRODUCTIONThe law of variable proportionThe law of variable proportion

describes the behavior of output asdescribes the behavior of output asthe quantity of one factor isthe quantity of one factor isincreased keeping the quantity ofincreased keeping the quantity of

other factors fixed.other factors fixed.

FUNCTIONFUNCTIONA relationship between dependentA relationship between dependentand independent variables is calledand independent variables is calledfunction.function.


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The law of variable proportion can bestarted as,

In a given state of technology,

when the units of variable factors ofproduction (labor) are increased withthe units of other fixed factors, themarginal productivity increases atincreasing rate up to a point after that

point it will become less and less.

DEFINITION:DEFINITION:


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(i) The state of technology is assumed begiven and unchanged.

(ii) The law specially operates in the short runbecause some factors are fixed and theproportion between factors is disturbed.

(iii) Variable factor units are homogeneous oridentical in amount and quality.

(Iv) The law is based on the possibility ofvarying the proportions in which the variousfactors can be combined to produce aproduct.

ASSUMPTIONS OF THEASSUMPTIONS OF THE

LAW:LAW:


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EXPLANATION OF THE LAW:

The law of variable proportion can be explainedwith the help of table and graph.

SCHEDULE:

Land Labour TP AP MP Stages Relationship10 1 10 10 10 First TP increase10 2 30 15 20 First MP increase10 3 60 20 30 First MP>AP10 4 80 20 20 Second MP &AP

decrease10 5 90 18 10 Second TP increase

10 6 90 15 0 Third10 7 80 11.5 -10 Third TP, AP & MP

decrease


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GRAPHICAL REPRESENTATION

OF LAW VARIABLEPROPORTION


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In the above schedule units of variable factors

(labor) are employed with the other fixedfactors of production. The marginal productivity of labor goes on

increase up to 3rd worker.

After the 3rd worker the marginal productivitygoes on falling on wards till it drops down tozero at the 6th unit of labor.

The 7th worker is responsible in making the

making the marginal productivity negative.The marginal productivity (MPL) and average

productivity (APL) equalize at the 4th workerthen MPL falls more sharply.

EXPLANATION:EXPLANATION:


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Three Stages OfThree Stages OfProductionProduction

Stage I

Increasing returns : marginal product

increases throughout.

Marginal product increases throughout.This means that every additional unitincreases productivity as well as totaloutput.

This is shown on the graph by an

increasing slope.


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Stage II

Diminishing Returns: marginal productdecreases throughout.

This means that every additional unitdecreases productivity, though total outputstill increases.

This is shown on the graph by a decreasing

positive slope.


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Stage III

Negative Returns: Marginal product isnegative throughout.

This means that each additional unitactually decreases total output. A wasteof money and resources.

This is shown on the graph by a negativeslope


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3 Stages Of Production :3 Stages Of Production :


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Conclusions, cont.Conclusions, cont.

The greatest productivity is at the end ofStage I.

The greatest output is at the end ofStage II.

Therefore, Stage II is ideal, becausethere is a balance between productivity

and total output.


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CAUSESCAUSES1.Indivisibility of factors of production: it

is not possible to pass it on to anotherman nor it is possible to make an

organiser to look after two firms whichmeans there is always some idle capacityin factors of production.

2.Division of labor : it is not possible for the

employer to have more complex divisionof labour and advantageous combinationof factors of production, emphasis is laidon the employment of more labor ratherthan capital.

3.


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CONCEPTS OF PRODUCTCONCEPTS OF PRODUCT


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There are three important concepts ofproduct in this connection:

1.Total product2.Average product

3.Marginal product4.Total product (TP):Total product of a variablefactor is the maximum output produced bycombining a given input of that factor with thefixed factor.


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Total product (TP)


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Average product (AP): The average productof a variable factor is simply the total product of

the factor divided by the total units of the variablefactor. It measures the average output per unit ofthe factor.Symbolically

AP=TP/L

AP= average product;TP=total product;

L=total units of variable factor which is assumedto be labour.The average product is an indicator ofproductivity of the variable factor.


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Average product (AP)


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Marginal product (MP): Marginal product of avariable factor is the change in total productresulting from the use of one more or one less unit

of the variable factor. In other words marginalproduct measures the rate at which output changesas a variable factor changes. Symbolically,

MP= TP/L or MPn = TPn-TPn-1

Here MP= marginal product of labour;TP= change in total product,L = change in variable factor which is assumed to belabour.MPn= marginal production of n units,TPn= total production of n units;TPn-1= total production of n-1 units)


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Marginal product (MP)


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The concepts of total production (TP),marginal production (MP) and averageproduction has been classified by the

following table:nits ofLand( )ectaresnits ofLabor otalProduction( )P

Marginal (roduction M)Average (roduction A)

0

11

1

1

1

1

1

1

0

12

3

4

5

6

7

8

0

25

9

12

14

15

15

14

0

23

4

3

2

1

0

(-)1

0

2.2 53

3

.2 8

.2 5

.2 1

.1 7


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Relation between Average Production

and Marginal production

1 ) The average product increases whenmarginal product is greater that average

product.2) The average product is at itsmaximum when both marginal product

and average product are equal.


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Cont..

3) The average product decreaseswhen marginal product is less thataverage product.

4) Marginal product can be positive;zero or negative, but average product

is always positive.


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Total, average, and marginalproduct
http://en.wikipedia.org/wiki/File:Total_product_curve_small.png


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Total Product Curve

1.The total product (or total physical product) of avariable factor of production identifies whatoutputs are possible using various levels of

the variable input.2.This can be displayed in either a chart that liststhe output level corresponding to variouslevels of input, or a graph that summarizes the

data into a total product curve.


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Cont.

3.The diagram shows a typical total productcurve. In this example, output increasesas more inputs are employed up untilpoint A.

4.The maximum output possible with thisproduction process is Qm. (If there are otherinputs used in the process, they are assumed

to be fixed.).


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Cont.

5. The average physical product is the totalproduction divided by the number of units ofvariable input employed.

6. It is the output of each unit of input. If there are10 employees working on a production processthat manufactures 50 units per day, then theaverage product of variable labour input is 5 units

per day


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Average and Marginal Physical

Product Curves1.The average product typically varies as more ofthe input is employed, so this relationship canalso be expressed as a chart or as a graph.

2. A typical average physical product curve isshown (APP). It can be obtained by drawing avector from the origin to various points on thetotal product curve and plotting the slopes ofthese vectors.


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3. The marginal physical product of a

variable input is the change in totaloutput due to a one unit change in thevariable input (called the discrete

marginal product) or alternatively therate of change in total output due to aninfinitesimally small change in thevariable input (called the continuous

marginal product).


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4. The continuous marginal product of avariable input can be calculated as the

derivative of quantity produced withrespect to variable input employed.5. The marginal physical product curve is

shown (MPP). It can be obtained from theslope of the total product curve.


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Average and Marginal Physical Product Curves
http://en.wikipedia.org/wiki/File:Average_and_marginal_product_curves_small.png

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