TOPIC: PRODUCTION FUNCTION

1.0 MEANING OF PRODUCTION

Production is the process of transforming inputs (factors of production) into output (goods
or services).

Examples (Tanzania context):

• A maise mill in Mbeya uses maize + labour + electricity → flour

• A tailoring shop uses fabric + sewing machines + labour → school uniforms
• A college uses lecturers + classrooms + ICT → education services

1.2 Meaning of Production Function

A production function shows the technical relationship between inputs and outputs.

It tells us the maximum output obtainable from given inputs.

General form:

𝑄 = 𝑓(𝐿, 𝐾)

Where:

• Q = Output
• L = Labour
• K = Capital
• f = function

Output depends on labour and capital.

1.3 Short Run vs Long Run

Short Run:

• At least one input fixed (usually capital)

• Labour varies

Example: Bakery has fixed ovens but can hire more workers.

Long Run:

• All input variables

• A firm can expand buildings, machines, and staff

Example: Building new classrooms.

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2.0 SHORT-RUN PRODUCTION (Capital Fixed)

2.1 Key Concepts

(a) Total Product (TP)

Total output.

(b) Average Product (AP)

𝐴𝑃 = 𝑇𝑃 ÷ 𝐿

Output per worker.

(c) Marginal Product (MP)

𝑀𝑃 = Δ𝑇𝑃

Extra output from one more worker.

Example:

Assume capital fixed.

Labour (L) Total Product (TP) Average Product (AP) Marginal Product (MP)
0 0 – –
1 10 10 10
2 25 12.5 15
3 45 15 20
4 60 15 15
5 70 14 10
6 75 12.5 5
7 73 10.4 –2

Interpretation of the Table:

Total Product (TP)

• Rises from 0 to 75
• Starts falling at 7 workers

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Marginal Product (MP)

• Rises first (10 → 20)

• Then falls (20 → 15 → 10 → 5)
• Becomes negative (–2)

Average Product (AP)

• Rises to a maximum at 3–4 workers

• Then declines

2.1 Graphs

(Using information from the table above, draw the TP curve and interpret)

(A) Total Product Curve

Horizontal axis: Labour

Vertical axis: Total Product

Shape:

TP
│
│ ●
│ ●
│ ●
│ ●
│●
└──────────────── L

Explanation:

• Initially steep (specialisation)

• Then flattens (crowding)
• Eventually falls (negative MP)

(B) Marginal Product Curve

MP
│ ●
│ ●
│ ●
│ ●
│____________________ L

• Rises initially
• Peaks
• Then declines

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 • Crosses the x-axis when TP is maximum

(C) Average Product Curve

AP
│ ●
│ ●
│ ●
│
└────────────── L

• MP intersects AP at AP’s maximum

• When MP > AP → AP rises
• When MP < AP → AP falls
• When MP = 0 → TP is maximum

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3.0 LAW OF DIMINISHING RETURNS

Definition:

When one input (labour) is increased while other inputs remain fixed, the marginal product
eventually falls.

From our table:

Labour MP
3 20
4 15
5 10
6 5

MP keeps declining. This is diminishing returns.

Tanzanian Example (Restaurant)

1 cook → 50 meals
2 cooks → +70 meals
3 cooks → +80 meals
4 cooks → +40 meals
5 cooks → +10 meals

The kitchen becomes crowded.

WHY diminishing returns happen:

• Fixed space
• Limited equipment
• Worker congestion
• Management difficulty

3.1 Three Stages of Production

Stage I: Increasing Returns

• MP rising
• AP rising

The firm should not stop here.

Stage II: Diminishing Returns

• MP positive but falling

• TP increasing

Rational firms operate here.

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Stage III: Negative Returns

• MP negative
• TP falling

Too many workers.

From the table:

Stage I: L = 1–3
Stage II: L = 4–6
Stage III: L = 7

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4.0 LONG-RUN PRODUCTION

Returns to Scale

(a) Increasing Returns to Scale

Inputs double → Output more than doubles.

Reason:

• Specialisation
• Technology

(b) Constant Returns to Scale

Inputs double → Output doubles

(c) Decreasing Returns to Scale

Inputs double → Output less than doubles

Reason:

• Management problems
• Coordination issues

Example:

Inputs Output
1 unit 100
2 units 220
3 units 300
4 units 360

11. Importance of Production Function

Helps firms to:

• Decide labour size

• Plan expansion
• Estimate output
• Control costs
• Maximise profit

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 REVISION QUESTIONS FOR TEST 2

THEORY OF THE FIRM & PRODUCTION FUNCTION

PART A: Multiple Choice Questions (15 Questions)

Choose the correct answer.

1. The main objective of a firm in traditional economic theory is to:

A. Increase sales
B. Maximise profit
C. Minimise cost
D. Increase market share

2. Profit is defined as:

A. TR − VC
B. AR − AC
C. TR − TC
D. MR − MC

3. Total Revenue (TR) is calculated as:

A. Price × Cost
B. Quantity × Cost
C. Price × Quantity
D. Profit × Quantity

4. The production function shows the relationship between:

A. Price and quantity

B. Cost and revenue
C. Inputs and output
D. Profit and sales

5. Marginal Product (MP) refers to:

A. Total output
B. Output per worker
C. Additional output from one more unit of input
D. Average output

6. Which cost does NOT change with output in the short run?

A. Variable cost
B. Marginal cost
C. Fixed cost
D. Average cost

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 7. Profit is maximised where:

A. TR is the highest
B. TC is lowest
C. MR = MC
D. AR = AC

8. When MR > MC, the firm should:

A. Reduce output
B. Stop production
C. Increase output
D. Maintain output

9. Which of the following is a variable input?

A. Factory building
B. Machinery
C. Land
D. Labour

10. Average Product (AP) is calculated as:

A. TP ÷ Labour
B. TP ÷ Capital
C. MP ÷ Labour
D. Output − Input

11. The law of diminishing returns states that:

A. Output always decreases

B. Costs always rise
C. Adding more variable input eventually yields smaller output increases
D. MP is always positive

12. Break-even point occurs when:

A. Profit is maximum
B. TR = VC
C. TR = TC
D. MC = AC

13. Shutdown point occurs when:

A. TR = TC
B. TR < VC
C. MR = MC
D. AR = AC

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 14. Marginal Cost is:

A. Cost per unit

B. Change in TC from one extra unit
C. Fixed cost per unit
D. Average cost

15. Opportunity cost refers to:

A. Money spent
B. Accounting cost
C. Best alternative forgone
D. Explicit cost only

PART B: Match the Following (15 Marks)

Match Column A with Column B

No. Column A Column B (Choose One) Answer

1 Production Function A. Input–output relationship ___
2 Fixed Cost B. Does not vary with output ___
3 Marginal Product C. Extra output from one more unit of input ___
4 Average Revenue D. TR ÷ Q ___
5 Profit E. TR − TC ___
6 Variable Cost F. Depends on output ___
7 Marginal Revenue G. Additional revenue from one extra unit sold ___
8 Break-even Point H. TR = TC ___
9 Shutdown Point I. TR < VC ___
10 Opportunity Cost J. Best alternative forgone ___
11 Total Revenue K. P × Q ___
12 Average Cost L. TC ÷ Q ___
13 Profit Maximisation M. MR = MC ___
14 Short Run N. Some inputs fixed ___
15 Long Run O. All input variables ___

PART C:

1. Explain the Production Function and the Law of Diminishing Returns. Using examples,
show how Total Product (TP), Average Product (AP), and Marginal Product (MP)
change as labour increases.
2. Discuss profit maximisation under the Theory of the Firm. Clearly explain the MR =
MC rule and how cost and production concepts guide firm decision-making in the short
run.
3. Calculations (Price elasticity, equilibrium price & quantity, profit maximisation, etc)

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