IntroductionThe Production Function and economic production

We have spoken of input like land and Labor and outputs like wheat and toothpaste. But if you have a fixed amount of inputs how much output can you get? In practice, the answer depends ‘on the state of technology and engineering knowledge On any day given the available technical knowledge, land, machinery, and so on only a certain quantity of tractors or toothpaste can be obtained from a given amount, of labor. The relationship between the amount of input required and the amount of output that can be obtained is called the production function. The production function specifies the maximum output that can be produced with a given quantity of input. It is defined for a given state of engineering and technical knowledge. For example we can imagine book of technical specifications that shows the production function for ‘generating electricity. On one page there &e specification for different-size gas turbines, showing their inputs (initial capital cost, fuel consumption, and the amount of labor needed to run the turbine) and their outputs (amount of electricity generated). The next page includes descriptions of several sizes of coal-fired generating plants, showing inputs and outputs. Yet other pages describe nuclear power plants, solar power stations, and so forth. Together they constitute the production function for electricity generation. Or consider the humble’ task of ditch digging.’ Outside our windows in America, we see a large and expensive tractor driven by one person with another to supervise. This team can easily dig a trench 5 feet deep and 50 feet long,, in 2 hours. When .we visit Vietnam, we see 50 laborers armed only with picks The same trench might take an entire day. These two techniques one Capital-intensive and the other labor-intensive are part of the production function for ditch digging. There are literally millions different production function one for each and every

product or service. Most of them are not written down but are in people’s minds. In areas of the economy where technology is changing rapidly, like computer software and biotechnology, production functions may become obsolete soon after they are used. And some Like the blueprints of a medical laboratory or cliff house, are specially designed’ for a specific location and purpose and would be useless anywhere else. Nevertheless, the concept of a production function is a useful way of describing the productive capabilities of a firm.

A production function can be represented in a table such as the one below. In this table five units of labor and two of capital can produce 34 units of output. It is, of course, always possible to waste resources and to produce fewer than 34 units with five units of labor and two of capital, but the table indicates that no more than 34 can be produced with the technology available. The production function thus contains the limitations that technology places on the firm.

A Production Function

Labor

5 30 34 37

4 26 30 33

3 21 25 28

2 16 20 23

1 10 13 15

1 2 3

Capital

The production function can also be illustrated in a graph such as that below. This graph looks exactly like a graph of indifference curves because the mathematical forms of the production function and the utility function are identical. In one case, inputs of goods and services combine to produce utility; in the other, inputs of resources combine to produce goods or services. A curved line in the graph shows all the combinations of inputs that can produce a particular quantity of output. These lines are called isoquants. As one moves to the right, one reaches higher levels of production. If one can visualize this as a three-dimensional graph, one can see that the production surface rises increasingly high above the surface of the page; the isoquants indicate a hill. The firm must operate on or below this surface.

There is one rule that seems to hold for all production functions, and because it always seems to hold, it is called a law. The law of diminishing returns says that adding more of one input while holding other inputs constant results eventually in smaller and smaller increases in added output. To see the law in the table above, one must follow a column or row. If capital is held constant at two, the marginal output of labor (which economists usually call marginal product of labor) is shown in the table below. The first unit of labor increases production by 13, and as more labor is added, the increases in production gradually fall.

The Marginal Product of Labor

Labor Marginal Output

First 13

Second 7

Third 5

Fourth 5

Fifth 4

The law of diminishing returns does not take effect immediately in all production functions. It is possible for the first unit of labor to add only four units of output, the second to add six, and the third to add seven. If a production function had this pattern, it would have increasing returns between the first and third worker. What the law of diminishing returns says is that as one continues to add workers, eventually one will reach a point where increasing returns stop and decreasing returns set in.

The law of diminishing returns is not caused because the first worker has more ability than the second worker, and the second is more able than the third. By assumption, all workers are the same. It is not ability that changes, but rather the environment into which workers (or any other variable input) are placed. As additional workers are added to a firm with a fixed amount of equipment, the equipment must be stretched over more and more workers. Eventually, the environment becomes less and less favorable to the additional worker. People's productivity depends not only on their skills and abilities, but also on the work environment they are in.

The law of diminishing returns was a central piece of economic theory in the 19th century and accounted for economists' gloomy expectations of the future. They saw the amount of land as fixed, and the number of people who could work the land as variable. If the number of people expanded, eventually adding one more person would result in very little additional food production. And if population had a tendency to expand rapidly, as economists thought it did, one would predict that (in equilibrium) there would always be some people almost starving. Although history has shown the gloomy expectations wrong, the idea had an influence on the work of Charles Darwin and traces of it still float around today among environmentalists.

If one increases all inputs in equal proportions, one travels out from the origin on a ray. There is no law to predict what will happen to output in this case. If a 10% increase in all inputs yields more than a 10% increase in output, the production function has increasing returns to scale. If it yields less than a 10% increase in output, the production function has decreasing returns to scale. And if it yields exactly a 10% increase in output, it has constant returns to scale.

Returns to scale are important for determining how many firms will populate an industry. When increasing returns to scale exist, one large firm will produce more cheaply than two small firms. Small firms will thus have a tendency to merge to increase profits, and those that do not merge will eventually fail. On the other hand, if an industry has decreasing returns to scale, a merger of two small firms to create a large firm will cut output, raise average costs, and lower profits. In such industries, many small firms should exist rather than a few large firms.

Most products require many more than two inputs, but showing a production function with more than two inputs with graphs or tables is difficult. Products require various types of labor and capital, energy of various sorts, and raw materials. One of the key inputs, especially in larger firms, is managerial ability. Inputs do not combine by themselves to produce output. Someone must have knowledge of how to combine inputs and to coordinate the production process.

If business decision-makers lack information or are incompetent, the firm will not make the best use of available resources. Or if morale is bad in a firm, people may work poorly and produce less than they could. In either case, the firm will produce below the maximum that the production function allows. Economist Harvey Liebenstein has called losses of these sorts "X-inefficiency." Although economists assume that the firm will be on the production function, a major challenge of management is to make decisions so that the firm will be on or close to the production function.

In explaining the theory of the firm, economists conventionally assume that the production function is fixed and that the firm operates on the surface of the production function. The firm need not consider the production function as fixed, but may view it as a variable that it can alter through research and development. Creativity in the form of new technology or new management techniques may loosen the boundary that the production function represents and may make possible greater profit, at least temporarily.

Practical Study

Company IntroductionThe Kohinoor Maple Leaf Group was born from the trifurcation of the Saigol group of companies and is a reputable and leading manufacturer of textiles and cement. KMLG comprises of Kohinoor Textile Mills limited (KTML) and Maple Leaf Cement factory limited (MLCF). Both companies are incorporated in Pakistan and are listed on three stock exchanges of the country.Maple Leaf Cement is the third largest cement factory in Pakistan. It was set up in 1956 as a joint collaboration between the West Pakistan IndustrialDevelopment Corporation and the government of Canada. It is strategicallylocated at Daudkhel (District Mianwali) in Northern Pakistan, which is an area rich in raw materials required for the production of cement. Kohinoor acquired the ownership and management of Maple Leaf Cement under the privatization policy of the government of Pakistan in 1992. Presently Kohinoor Textile Mills is the holding company for Maple Leaf cement.

VisionIn order to remain competitive in the market the management at Maple Leaf continuously re evaluates its business strategies. With the increase of furnace oil prices the company adopted coal as a more cost efficient and environmentally friendly fuel for kiln firing. Today the management believes that the future lies in exploring the possibilities of alternative and cheaper fuels such as waste firing. This would further reduce production costs whilst promoting a culture of environmental awareness, health and safety.

CapacityAt the time of privatization in 1992, the capacity of Maple Leaf to produce Ordinary Portland Cement (OPC) was 1000 tones per day (tpd). A second plant of 4000 tpd was commissioned in 1998 and a third plant of 6700 tpd came into production in 2006. It increased the total capacity to 11,700 tpd. The capacity of White Cement has also increased from 100 tpd to 500tpd with the addition of a new plant. This plant also has provisions for doubling the capacity to 1000tpd. Presently Maple Leaf cement has 9% of the market share of OPC and is a leading brand in Pakistan with a diverse customer base. It is also the largest producer of White Cement in the country with 80% of market share.

PRODUCT STANDARDIZATION

PLANT AND EQUIPMENT

There are three production lines for grey cement with annual clinker capacity of 1.5 million tons. The white cement has three production lines with annual capacity of 180,000 tons.This capacity has increased over a number of years since maple leaf wasestablished in 1960. However we would like to discuss the recent up gradations.

• In 2000, Maple Leaf Electric Company Ltd. (MLEC) a power generation unit was merged into the company.• In 2004, the coal conversion project at new dry process plant was

completed.• In 2005, dry process plant capacity was increased from 3,300 tpd to 4,000 tpd through de-bottlenecking and up-gradation of equipment and necessary adjustments in operational parameters.• In 2006, a project to convert the existing wet process line to a fuel efficient dry process white cement line commenced its commercial production.• Currently, Company has undertaken an expansion project of 6,700 tpd clinker capacity and is expected to commence its commercial production as per schedule.

Technology

The plants of 4000 tpd, 6700 tpd and of White Cement are state of the art and have been supplied by FLSmidth in Denmark. In order to ensure the highest efficiency and process control the plants comprise of equipment with the latest design and technology. To maintain the highest quality standards a laboratory has also been set up at site for the testing of raw materials and cement. All Maple Leaf plants comply with National Environment Control standards.

RESEARCH AND DEVELOPMENT AND TECHNOLOGY

Research & development is an integral part of the Company’s policy ofdevelopment of new products and improving efficiency of the plant toreduce cost. Through research and development Maple Leaf Cementintroduced the dry process technology which helped in reducing NO emissions in the air from 4.5 kg/ ton to 1.5 kg/ton thus considerably lowering the pollutants in the air and increasing the overall plant capacity.Although research doesn’t form an integral part of the plant but we can observe many strategic developmental programs that have been conducted with many in the pipeline.To retain the highest quality standards a laboratory has also been set up at the site for the testing of raw materials and cement. This also helps Maple Leaf to comply with national environment control standards.

TECHNOLOGY IMPROVEMENT

The Maple Leaf Cement Factory is completely automated and the plant installation. The engineers constantly work to improve the efficiency and effectiveness of the machinery. The highlighted techniques included

1. Troubleshooting2. Continuous improvement under the Kiazen approach3. ISO specified changes in work procedures and capacity utilization4. Change in Hierarchy to support production

MATERIALS AND ENERGY

The following raw material is required in the production process

1. Lime stone: This raw material is company owned and is extracted fromthe near by mountains of Iskanderabad. Limestone has the highest composition in the cement product. 75% to 80% of the cementconstitutes of limestone.

2. Clay: Clay is another natural resource. This raw material is alsocompany owned. 15% to 20% of cement composition comprises of clay.

3. Iron Ore: Iron Ore is the only resource that is bought from contractors.Iron Ore is added in small quantities and it helps to strengthen thecement.

4. Gypsum: Gypsum acts as a retarding agent. It slows down the hardeningprocess which in turn gives the constructor enough time to use it.5. Furnace oil: It is used mainly for power generation.

With the increase of furnace oil prices the company adopted coal as a more cost efficient and environmentally friendly fuel for kiln firing. Today the management is exploring possibilities of alternative and cheaper fuel such as waste firing.The process (discussed later) is such that it ensures that excess stock isn’t left and on the other hand enough stock is present so that the production process is not hindered.

WORK METHODSPROCESSRaw MaterialsThere are basically three main raw materials that are used for the production of cement. In addition to that, a small proportion of other additives such as silica are also added.1. Limestone 80%2. Clay 20%3. Iron oreLime stone and clay are extracted from the same place. Iron ore is bought from a contractor near Kalabagh.

Stage 2The raw materials are feeded in separate “crushers” that break them intosmaller pieces. After that they are stored in separate piles.

STORAGE AREA

It is a stacker that provides immediate storage. In case there is a problem with the crusher, the stock present can be utilized immediately to provide enough amounts to be used for three days.

Stage 3From the stacker the components are mixed and made into an ultra fine powder in the grinder. A weighing scale is maintained to check that the appropriate composition of the materials is maintained and the right quantity is added. Again the mixture is stored in a Consistent flow Silo. It is to be noted that until now only a physical change has taken place. The next step would involve a chemical change.

Stage 4The mixture is then added into a KILN. This is a rotating machine that heatsthe mixture up to 1300*C where it is converted into a compound as a chemical reaction takes place. This compound is the cement produced in molten form. As it moves onwards an air cooler is present that cools the cement and converts it into small stones known as CLINKER. This is the intermediate product that is formed. After that the clinker is stacked in piles.

Step 5The clinker is then added into a grinder. At this stage another element known as Gypsum is added. The composition of the cement is 95% and that of gypsum is 5 %. The gypsum acts as a retarding agent. Cement on its own when kept in contact with water hardens very fast. It ensures rapid setting but gives cement the time to harden In the grinder the cement is crushed into a powder form. This stage is very critical in the cement production process because of the fact that if something goes wrong with the composition, the quality of the cement gets affected and the whole costs that are incurred to produce the cement is wasted. Because of that the quality check at this stage is the maximum and continuous.

EXTERNAL FACTORS

ECONOMIC FACTORSMarket for Cement in Pakistan exists in two main dimensions:1. product type2. And geographic area.

Product type:Since cement is a specialized product, requiring sophisticated infrastructureand production location. So, most of the cement industries in Pakistan arelocated near/within mountainous regions that are rich in clay, iron and mineral capacity. Structure of Cement industry in Pakistan is as such that there is not much substitutability to buyers. Which shows that the Cross elasticity of demand is negligible.

Geographical Area:The other factor i.e. geographic location also doesn’t affects a lot considering the flexibility of demand. Example can be taken from the fact that if DG cement in DG KHAN raises its price and MAPLE LEAF CEMENT in DaudKhel will raise its price to match DG cement’s. This isdue to cartel of all of the cement manufacturers in Pakistan. Thus the customer has no choice at all to switch between two brands of cement.As the cement market is moving from a virtual 'sellers' market' to an oversupply situation, it is expected that when prices stagnate and profitability becomes a function of volume and economies of scale, location advantage and proximity to markets will become extremely important factors.

At present the freight charges are a massive 20% of the retail prices. The plants located very close to each other and tapping the same market will have to expand their markets which will increase their freight expenses.

Pakistan Cement Industry

Cement is one of major industries of Pakistan. Pakistan is rich in cement raw material. Currently many cement plants are operating in private sector. Pakistan Cement Industry has huge potential for export of cement to neighbouring countries like India, U.A.E, Afghanistan, Iraq & Russian States. There has been a robust growth of cement demand seen both in domestic and exports market during the financial year ended June 30, 2007. The industry achieved an overall growth of 32% with domestic demand of cement increased by 24.95% whereas the exports increased by 111.86%. The overall growth achieved by many cement factories for the year under review was 111.29% consisting of domestic and export markets at 71.02% and 335.12% respectively.

Pakistan Cement industry has been successful to capture export markets of various GCC and African countries which are new markets for the Country other than the conventional export markets of Afghanistan and Iraq.

Browse Major Pakistan Cement Plants in left menu

Pakistan ranked 5th cement exporter in World

Pakistan cement factories continue to make significant progress in cement exports. Now Pakistan is ranked 5th in the world’s cement exports after a huge increase of 47 percent in exports during last fiscal year.

According to the Global cement report, China maintained first position with 26 million tonnes in exports, while Japan got second position by exporting 12.6 million tonnes of cement. Third largest cement exporter in world is Thailand with around 12 million tonnes, followed by Turkey which exported 11.6 million tonnes of cement. Pakistan now at 5th position has left Germany behind by exporting 11 million tonnes of cement during last fiscal year. Germany now stands at 6th position with 9 million tonnes exports.

Cement market experts told that Pakistan secured 5th position because of high demand of cement in nearby countries and by capturing new markets such as African countries, Qatar & Iraq. Pakistan could achieve the mark of 13 to 14 million tonnes exports by the end of the fiscal year keeping in view Indian market which has once again started importing cement from Pakistan. The export of cement from Pakistan to india showed a sharp decline after Mumbai attacks.

Data Collection Method

Primary Data

BOOKS

Economics (Samuelson,Nordhaus)

18h Edition

Part#2

Chapter# 6

Page # 108

Web site

www.wikipedia.org

http://www.cement.com.pk/latest-developments/112-pakistan-5th-cement-exporter.htmlwww.accel-team.com/productivity/productivity_01_what.htmlwww.productivity.com

Secondary Data

Organization

Maple leaf cement factory pvt

Web site

http://www.kmlg.com/kmlg/cement

SWOT Analysis

Strength

Maple Leaf Cement is the third largest cement factory in Pakistan.

There Plants capacity is1.5 million tons.

They have latest plants and equipment in Pakistan.

They have a great understanding with there labors.

Weakness

There main product is white cement so they are not very focus on OPC that’s why they have 80% market share in white cement and 9% of OPC.

Opportunities Threats

Pakistan is ranked 5th in the world’s cement exports and every passing day the demand of Pakistan cement is increasing so it is big export opportunity.

The technology is moving very fast and its really help to decrees the cost level in production. Pakistan government given some edge to the cement sector to import the production plants on some reasonable duty conditions.

The policy of the Government is to keep a balance between rapid economic development, on the one hand, and social justice and consumer’s protection, onthe other. There is a traditional conflict between these two aims. It is, therefore, necessary to regulate trade, commerce or industry in the interest of free competition therein.

Restriction of export of cement is deterring the full potential of this sector.

The economical condition of country is also effect on cement industry.

ConclusionConclusion

In my conclusion the importance of productivity is imminent and is the need of the hour. Real gains in productivity are important then simply measuring success in meeting objectives. Improvements in productivity have a significant impact on lives whether the change occurs at the national level, within the given industry or a company or even at the individual level.Changes in productivity within an industry or at the company level are closely related to success and survival. The profit margins realized by an industry or a specific company are related to its ability to make productivity gains ahead of the competition. Industries where competition helps to propel improvement often

experience greater growth. Companies that fail to keep in pace will fail. In either case, all stakeholders are directly impacted.Now keeping in view the analysis of Maple Leaf with respect to its productivity of labor, capital and growth, we have concluded that the current expansion of its capacity and induction of newer plant with capacity of 6700tons might have caused short term costs. But in due course of time it would provide higher returns in the form of sales and revenue earned.

Secondly, the current management is actively resorting to international set of quality standards so that to meet the upcoming competition with regards toWTO. So the productivity and efficiency with regards to effectiveness of theplant is very important its not only help to create impact on production but its also help to decrease the cost of production.

Recommendations

Maple leaf is the third big organization in Pakistan. . Presently Maple Leaf cement has 9% of the market share of OPC and is a leading brand in Pakistan with a diverse customer base. It is also the largest producer of White Cement in the country with 80% of market share. There total focus is on white cement my recommendation they should increase there production in gray cement and second for the better production they should import new technology like Simatic PCS 7 for better fast and economical production.

References

BOOKS

Economics (Samuelson,Nordhaus)

18h Edition

Part#2

Chapter# 6

Page # 108

Web site

www.wikipedia.org

http://www.cement.com.pk/latest-developments/112-pakistan-5th-cement-exporter.htmlwww.accel-team.com/productivity/productivity_01_what.htmlwww.productivity.comhttp://www.kmlg.com/kmlg/cement