THEORY OF PRODUCTION

Economics For Managers

Module - 3
 Syllabus
• Production function: Laws of variable
proportions,
• Economies and diseconomies of scale,
Economies of Scope, Isoquants and Isocost,
optimum combination of inputs.
• Analysis of Risk and Uncertainty.

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• Production is a process that business uses to
convert inputs into outputs.

• Production involves a series of activities that

convert the inputs into outputs that people
can use for the fulfillment of their needs.

• Production is basically the transformation of

inputs into output.
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• Input is anything that is utilised in the
creation of a commodity and output is
something that gets produced at the end of
the production process.

• The relationship between inputs and outputs

is defined using Production Function.

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• In economic sense production process may take
variety of forms other than manufacturing.

• Example –
– Transporting sand from river bank to construction site.

– Wholesaling, retailing, packaging, assembling are

productive activities.

• Some production activities involve an intangible

inputs to produce an intangible output.
– Legal, medical, consultants….

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 Definition – Production Function

• A production function is a function that

represents the quantity of output a firm
can produce given a certain quantity of
input combination.

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• Production Function is the relationship
between
– Physical inputs (land, labour, capital, etc.) and
– Physical outputs (quantity produced).

• It is a technical relationship that studies

material inputs on one hand and
material outputs on the other hand

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 Example
• Cultivation is the earliest form of production

• Say - The farm has around 1000 apple trees.

– The farm's inputs are the land, the machinery, and the
labor and the output is the number of apples it
produces.
– Production function – the relationship between
• Inputs (the quantity of labor, the size of the land, and the
machinery used) and
• Quantity of output (the quantity of apple that was
produced).

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 Assumptions of Production Function
1. Both inputs and outputs are divisible.
2. There are only two factors of production, i.e.,
labour (Variable element) and capital (Fixed
element).
3. Factors of production are imperfect
substitutes.
4. Technology is constant

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• In a standard equation,
– The production function is represented by Q,
– Labour (Variable element) is represented by L, and
– Capital (Fixed element) is represented by K.

• Example
– When there are 4 units of labour and
– 5 units of capital
– The equation for the production function is
Q = f(4,5).

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• In the above graph,
• X-axis represents inputs that are being used in
the production process.
• Y-axis represents outputs that get produced.
• Q is the Production Function.

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• In real life production function is more
complex.
• Q = f(LB, L, K, M, T, t)
LB – land & Building
L – Labour
K – Capital
M – Raw Material
T – Technology
t – Time

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 Classification of Factors of Production
1. Variable Factors
– Variable Factors are the factors that can be
changed during the course of the short run.
– Variable factors vary with the level of output.
– An increase in variable factors leads to more
production and vice-versa.
– Employment of variable factors is not required
when there is no production. Variable factors
include labour, power, fuel, etc.

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2. Fixed Factors
– Fixed Factors are the factors that can not be
changed in the short run. The number of fixed
factors always remains constant even when is
zero production. Fixed factors include land,
capital, building, etc.

• Note: Production in the short run can only be

increased by increasing the variable factor
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• Firm can increase both fixed and variable factors
of production to increase production
• Whether the firm can increase both factors
depends on the time.
• Time taken to increase capital takes long time.
Hence supply of capital is inelastic in short run.
• In short-run you can increase the production by
increasing the supply of labour.
• Hence we have two kinds of production function
– Short-run production function and
– Long-run production function

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 Features of Production Function

1. Complementary
– A producer will have to combine the inputs to
produce outputs.
– Outputs can not get generated without the use of
inputs.

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2. Specificity
– For any given output, the combination of inputs that
may be used is clearly defined.
– What type of factors are needed for the production
of a particular product is clearly mentioned before
the actual production gets started.
3. Production Period
– The period of the production process is clearly
explained to the production unit.
– Each stage of production is given some specific time.
Production generally gets completed over a long
period of time.

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 Types of Production Function
1. Short-run Production Function
2. Long-run Production Function

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 1. Short-run Production Function
• Short Run is a period of time where output
can only be changed by changing the level of
variable inputs.
• In the short run, some factors are variable and
some are fixed.
• Fixed factors remain constant in the short run
like land, capital, plant, machinery, etc.

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• Production can be raised by only increasing
the level of variable inputs like labour.
• Therefore, the situation where the output is
increased by only increasing the variable
factors of input and keeping the fixed factors
constant is termed as Short Run Production
Function.
• This relationship is explained by the ‘Law of
Variable Proportions.’

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 2. Long-run Production Function
• Long Run is a span of time where the output
can be increased by increasing all the factors
of production whether it is fixed (land, capital,
plant, machinery, etc.) or variable (labour).

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• Long run is enough time to alter all the factors
of production.
• All factors are said to be variable in the long
run.
• Therefore, the situation where the output is
increased by increasing all the inputs
simultaneously and in the same proportion is
termed Long Run Production Function.
• This relationship is explained by the ‘Law of
Returns to Scale’.
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 Concept of Product
• Product or output refers to the volume of the
goods that the company produces using
inputs during a specified period of time.
• The concept of product can be looked at from
three different angles:
– Total Product,
– Marginal Product, and
– Average Product.

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 1. Total Product

• Total Product (TP) refers to the total quantity

of goods that the firm produced during a
given course of time with the given number of
inputs.

• Total Product is also known as Total Physical

Product (TPP) or Total Output or Total Return

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• For example
– If 1 labourer produces 10 kg of wheat, then the
total product for 6 labours is 60 kg.
– A company can increase TP in the short term by
focusing primarily on the variable components.
– Over time (long term), both fixed and variable
elements can be increased to raise TP.

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 2. Average Product
• Average Product refers to output per unit of a
variable input.
• AP is calculated by dividing TP by units of the
variable factor.
• For example, if the total product is 60 kg of
wheat produced by 6 labours (variable inputs),
then the average product will be 60/6, i.e., 10 kg.
• Average Product = Total Product/Units of
variable factor
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 3. Marginal Product
• Marginal Product refers to the addition to the
total product when one more unit of a
variable factor is employed.
• It calculates the extra output per additional
unit of input while keeping all other inputs
constant.
• Other names of Marginal Product
are Marginal Physical Product
(MPP) or Marginal Return.

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• MPn = TPn – TPn-1
• Here,
– MPn = Marginal product of nth unit of the variable
factor,
– TPn = Total product of n units of the variable
factor, and
– TPn-1 = Total product of (n-1) units of the variable
factor

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 Revision
• Describe production function
• What is total product?
• What is marginal product?
• What is average product?

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 Law of Variable Proportion
• Law of Variable Proportion is regarded as an
important theory in Economics.

• Law of variable proportion is also known as the

Law of Proportionality.

• The law states that when the quantity of one

factor of production is increased, while keeping
all other factors constant, it will result in the
decline of the marginal product of that factor
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• When variable factor is increased while
keeping all other factors constant,
– the total product will increase initially at an
increasing rate,
– next it will be increasing at a diminishing rate and
– eventually there will be decline in the rate of
production.

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 Assumptions of Law of Variable
Proportion
• Constant state of Technology
– It is assumed that the state of technology will be
constant and with improvements in the
technology, the production will improve.
• Variable Factor Proportions
– This assumes that factors of production are
variable. The law is not valid, if factors of
production are fixed.

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• Homogeneous factor units
– This assumes that all the units produced are
identical in quality, quantity and price. In other
words, the units are homogeneous in nature.

• Short Run
– This assumes that this law is applicable for those
systems that are operating for a short term, where
it is not possible to alter all factor inputs.

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 Stages of Law of Variable Proportion

1. First Stage or Stage of Increasing Returns

– In this stage, the total product increases at an
increasing rate.
– This happens because the efficiency of the fixed
factors increases with addition of variable inputs
to the product.

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• Second Stage or Stage of Diminishing Returns
– In this stage, the total product increases at a
diminishing rate until it reaches the maximum
point.
– The marginal and average product are positive but
diminishing gradually.

• Third Stage or Stage of Negative Returns

– In this stage, the total product declines and the
marginal product becomes negative.

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 No of Total Product Marginal Average Phases of
Workers (TP) Product Product Production
Tonnes (MP) (AP) (Based on MP)
1 24 24 24
2 72 48 36
3 138 66 46 Increasing
4 216 78 54 Return
5 300 84 60
6 384 84 64
7 462 78 66
8 528 66 66 Diminishing
9 576 48 64 Returns
10 600 24 60
11 594 -6 54
Negative Return
12 552 -42 46
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 Application of Law of Diminishing
Returns
• The Law helps to identify rational and irrational
stages of Operations.
• It can tell the business managers the number of
workers to apply to a given fixed input so that,
given all other factors, out put is maximum.
• Stage I indicates under utilization of capital.
• Stage III means accepting negative productivity of
labour,
• Stage II gives the firm the optimum amount of
labour that can be employed by the firm.

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 Revision

• Describe law of variable proportion?

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 ECONOMIES OF SCALE
• Economies of scale may be defined as the
– cost advantages that can be achieved by an
organisation by the expansion of their production
in the long-run.

– Therefore, the advantages of large scale expansion

are known as economies of scale.

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• Economies of scale are a long- term concept
which is achieved when there is an increase in
the sales of an organisation.
• Due to the lowering of production cost, the
organisation can save more and invest it in
buying bulk of raw materials that can again be
obtained at a discount.
• These are the benefits of Economies of Scale.

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 Types of Economies of Scale
1. Internal Economies of Scale
2. External economies of Scale

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 Internal Economies of Scale
• Internal Economies are the real economies
that arise from the expansion of the
organisation.
• These economies are the result of the growth
of the organisation itself.

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• Internal economies of scale refer to the cost
advantages that a single firm can achieve as it
grows in size and expands its production capacity.
• These cost savings are typically a result of factors
under the firm's direct control, such as improved
production processes, specialization of labor, and
better management practices.
• Internal economies of scale are specific to the
individual firm and are a result of its internal
operations and decisions.
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 External Economies of Scale
• External economies of scale refer to the cost
advantages that multiple firms in the same
industry or region can collectively enjoy as the
industry or region grows.
• These cost savings are typically a result of factors
beyond the control of any single firm, such as
the availability of a skilled labor force, specialized
suppliers, infrastructure development, or a
supportive business environment.

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• These economies are result of improved
quality of factors outside the organisation like
better transportation, better labour,
infrastructure, etc.
• Due to the betterment of these external
factors, the cost of production per unit of an
item in the organisation decreases.

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 Types of Economies of Scale
• Technical Economies:
– These occur when a firm can produce goods or
services more efficiently as it increases its scale of
production.
– Factors such as specialization of labor, better
utilization of machinery, and improved production
processes can lead to technical economies of scale.
• Managerial Economies
– Larger firms may benefit from having specialized
management teams, better coordination, and more
efficient decision-making processes.
– This can result in cost savings and increased efficiency.

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• Marketing Economies
– As firms grow larger, they often have more resources
to allocate to marketing and advertising efforts.
– This can lead to lower advertising costs per unit sold
and increased market presence.
• Financial Economies
– Larger firms may have access to more favorable
financing options, including lower interest rates on
loans and better terms from suppliers due to their size
and financial stability.
• Risk-Bearing Economies
– Larger firms may be better equipped to handle
unexpected market fluctuations and risks, reducing
the overall cost of risk management.

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 Dis-economies of Scale
• Diseconomies of scale happen when a
company or business grows so large that the
costs per unit increase.
• It takes place when economies of scale no
longer function for a firm.
• With this principle, rather than experiencing
continued decreasing costs and increasing
output, a firm sees an increase in costs when
output is increased.

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 Types of Dis-economies of Scale
• Internal Dis-economies of Scale
• External Dis-economies of Scale

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 Internal Dis-economies of Scale
– Internal Diseconomies of Scale are the
Diseconomies resulting from the internal
difficulties within the organisation.

– The Internal Diseconomies are the factors that

raise the cost of production of an organisation
like lack of supervision, lack of management and
technical difficulties.

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 External Dis-economies of Scale
– External Diseconomies of Scale are the external
factors that result in the increase in the
production per unit of a product within an
organisation.
– The external factors that act as a restrain to
expansion may include the cost of production per
unit, scarcity of raw materials, and low availability
of skilled labours.

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 Types of Dis-economies
• Managerial Diseconomies
– As firms become very large, the management
structure can become overly complex and less
efficient.
– Communication breakdowns and bureaucracy may
increase, leading to higher costs.

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• Coordination and Control Problems
– Larger firms often struggle to maintain effective
control and coordination among various departments
and divisions, leading to inefficiencies and higher
costs.
• Worker Alienation
– In very large organizations, employees may feel
disconnected from the company's goals and values,
which can result in lower productivity and higher
turnover rates.
• Communication Challenges
– With an increase in size, communication becomes
more challenging, leading to misunderstandings and
errors that can increase costs.
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 Laws of Returns to Scale
• When the firm expands its scale of production
i.e. it increases both the inputs (variable and
fixed) in certain proportion, there are three
technical possibilities.
1. Total output may increase more than
proportionately.
2. Total output may increase proportionately.
3. Total output may increase less than
proportionately.
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• These three possibilities gives us three laws:

1. The law of increasing returns to scale

2. The law of constant returns to scale
3. The law of diminishing returns to scale

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 Factors Behind Increasing Returns to Scale

1. Technical and Managerial Indivisibilities

– Inputs such as mechanical equipment and managers
used in the process of production are available in
given size. Such inputs cannot be divided into parts
to suit small scale production.
2. Higher degree of specialization
– The use of specialized labour suitable to a particular
job and of a composite machinery increases
productivity of both labour and capital per unit of
inputs.
– Their cumulative effects contribute to the incresing
returns to scale.

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3. Dimensional Relations
– Increasing returns to scale is also a matter of dimensional
relations.
– Example: when the length and breadth of the room (15’ x
10’ = 150 sq ft.) are doubled, the the size of the room is
more than doubled (30’ x 20’ = 600 sq. ft.)
– When the diameter of a pipe is doubled the flow of water
is more than doubled.
– As per dimensional relationship, when the labour and
capital are doubled the output is more than doubled

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 Factors Behind Constant Returns to Scale

• Example:
a. 1K + 1L = 10
b. 2K + 2L = 20
c. 3K + 3L = 30
• The constant return scale are attributed to the
limits of economies of scale.
• Economies of scale arise due to
– Indivisibility of fixed factors
– Greater possibility of specialisation of capital & labour
– Use of more efficient techniques of production

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• But there is limit to economies of scale.
• When the economies of scale reach their limit
and dis-economies are yet to start, the
returns to scale become constant,
• Constant returns to scale takes place also
where factors of production are perfectly
divisible.

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 Factors Behind Diminishing Returns to Scale

• The decreasing returns to scale are attibuted to

the dis-economies of scale.
1. The most important factor that caused
diminishing return to scale is – ‘Diminishing
return to Management’ (managerial
diseconomies) .
2. Exhaustibility of the natural resources.
– Example- doubling the coal mining plant may not
double the coal output because of limitedness of
coal deposits.

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 ECONOMIES OF SCOPE
• Economies of scope refer to the cost
advantages that a company can achieve by
producing a wider variety of goods or
services.
• This is in contrast to economies of scale, which
refer to the cost advantages that a company
can achieve by producing more of the same
good or service.

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 Reasons for Economies of Scope
1. Companies may be able to share resources
across different product lines.
• For example, a company that produces both cereal
and cookies may be able to share the same marketing
department or distribution network.
2. Companies may be able to develop expertise in
a particular area that can be applied to other
products.
• For example, a company that develops a new
manufacturing process may be able to use that
process to produce other products as well.

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 Benefits of Economies of Scope
1. Lower costs
– By sharing resources and developing
expertise, companies can reduce their overall
costs.

2. Increased product offerings

– Companies can offer a wider variety of products to
their customers, which can lead to increased sales
and revenue.
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3. Greater competitive advantage
– Companies with economies of scope can be more
competitive in the market because they can produce
products at a lower cost than their competitors.

4. Increased risk diversification

– Offering different products reduces dependence on a
single market, mitigating risk in economic downturns.

5. Stronger brand image

– A wider product portfolio can solidify a company's
brand and market position

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 Types of Economies of Scope
• Production Sharing: When producing different
goods involves shared resources like
machinery, labor, or facilities, leading to cost
savings. (e.g., airlines)
• Marketing and Distribution Sharing: Shared
marketing campaigns, distribution
channels, or brand recognition across
products reduces costs. (e.g., fast-food chains)

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• Management Sharing: Expertise and
resources in management, R&D, or technology
can be leveraged across products. (e.g., tech
platforms)
• Intangible Resource Sharing: Brand
image, customer goodwill, or intellectual
property can be used across products for
efficiency. (e.g., hospitals)

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 Factors affecting Economies of Scope
• Similarity of Products: The closer the
production processes, marketing, or
technology, the greater the potential for cost
sharing.
• Fixed Costs: Economies of scope are more
significant when fixed costs are high, as
spreading them across more products leads to
larger savings.

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• Management Complexity: Balancing diverse
operations can be challenging, requiring
efficient coordination to avoid diseconomies.
• Market Demand: The existence of demand for
multiple products is crucial to reap the
benefits of economies of scope.

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 Limitations to the Economies of Scope
• Diseconomies of Scope: Overly complex
operations or poorly managed diversification
can lead to increased costs and inefficiencies.
• Focus and Expertise: Maintaining core
competences while expanding is crucial to
avoid losing focus or diluting expertise.
• Antitrust Concerns: Mergers and acquisitions
aiming for economies of scope might raise
antitrust concerns if they reduce competition.

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 Isoquants
• Isoquant is the tool to analyse the production
with 2 variables.
• Here we are analysing the relationship
between input and output under the
condition that both the inputs, capital and
labour are variable factors.
• In the long-run supply of both inputs is elastic
and firms can use larger quantities of both
labour and capital.

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• The laws of returns to scale is explained
through
– Production function and
– Isoquant curves

• ‘Isoquant’ has been derived from Greek word

‘iso’, meaning equal.

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• Isoquant is defined as – ‘locus of points
representing various combinations of two
inputs - capital and labour – yielding the
same output’.
• Isoquant curve is analogous to ‘Indifference
Curve’.
• Isoquant curve is also called as –
– Equal Product Curve
– Production Indifference Curve

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 Assumptions
• Isoquant curves are drawn based on following
assumptions:
1. There are only two inputs – Labour (L) and
Capital (K).
2. Both L and K and product X are perfectly
divisible.
3. The 2 inputs labour and capital – can substitute
each other but at diminishing rate as they are
imperfect substitutes
4. Technology of the production is given (constant)

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 Capital Labour Combinations and
Output
Input Combinations
Points Output
K + L

A OK4 + OL1 = 100

B OK3 + OL2 = 100

C OK2 + OL3 = 100

D OK1 + OL4 = 100

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 Properties of Isoquant Curves
1. An isoquant curve slopes downward, or is
negatively sloped.
– This means that the same level of production only
occurs when increasing units of input are offset
with lesser units of another input factor.
– This property falls in line with the principle of
the Marginal Rate of Technical Substitution
(MRTS).

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 – MRTS - (The marginal rate of technical
substitution) is an economic theory that illustrates
the rate at which one factor must decrease so that
the same level of productivity can be maintained
when another factor is increased.
– The MRTS reflects the give-and-take between
factors, such as capital and labor, that allow a firm
to maintain a constant output.
– As an example, the same level of output could be
achieved by a company when capital inputs
increase, but labor inputs decrease.

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2. An isoquant curve, because of the MRTS
effect, is convex to its origin.
– This indicates that factors of production may be
substituted with one another. The increase in one
factor, however, must still be used in conjunction
with the decrease of another input factor.

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3. Isoquant curves cannot be tangent or
intersect one another.
– Curves that intersect are incorrect and produce
results that are invalid, as a common factor
combination on each of the curves will reveal the
same level of output, which is not possible.

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4. Isoquant curves in the upper portions of the
chart yield higher outputs.
– This is because, at a higher curve, factors of
production are more heavily employed. Either
more capital or more labor input factors result in a
greater level of production.

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5. An isoquant curve should not touch the X or
Y axis on the graph.
– If it does, the rate of technical substitution is void,
as it will indicate that one factor is responsible for
producing the given level of output without the
involvement of any other input factors.

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6. Isoquant curves do not have to be parallel to
one another.
– The rate of technical substitution between factors
may have variations.
– If isoquant intersect or are tangent, the laws of
production get violated
• Given the technology, a combination of two inputs, can
produce two different quantities.
• Given quantity of commodity can be produced with
smaller and larger combination of inputs

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7. Isoquant curves are oval-shaped.
– This allows firms to determine the most efficient
factors of production.

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 Isocost
• This line shows the different combinations of
inputs that can be employed given a certain
level of cost outlay.
• Isocost is also known as
– Isocline
– Budget line
– Budget Constraint Line

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• An isocost line is a graph showing various
possible combinations of inputs (labor and
capital) that can be purchased for an estimated
total cost.
• Any combination of inputs on an isocost line
provides the same total cost for the output.
• An isocost line is a graph that depicts potential
input (labor and capital) combinations that can
be acquired at an estimated total cost.
• The slope of the isocost line is given by the ratio
of the input prices, PL/PK
• (PL – price of labour; PK – price of capital)

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• The equation of the isocost line is
• 𝑇𝐶 = 𝐾 ∗ 𝑃𝑘 + 𝐿 ∗ 𝑃𝑙
• Where :
TC = Total Cost
K – Total Capital Required
𝑃𝑘 − 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
L – Total Labour Required
𝑃𝑙 − 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑙𝑎𝑏𝑜𝑢𝑟

Batch 2025-27 Dr. Kiran Hiremath - EM - Module 3 89

 As shown in the above figure, if the producer spends the whole
amount of money to purchase X, then he/she can purchase 100 units
of X, which is represented by OL. On the other hand, if the producer
purchases Y with the whole amount, then he/she would be able to get
60 units, which is represented by OH.
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• If points H and L are joined on X and Y axes
respectively, a straight line is obtained, which
is called iso-cost line.
• All the combinations of X and Y that lie on this
line, would have the same amount of cost that
is Rs. 300.
• Similarly, other iso-cost lines can be plotted by
taking cost more than Rs. 300, in case the
producer is willing to spend more amount of
money on production factors.

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 Difference between iso-cost and
iso-utility (indifference Curve)
Iso-Cost Iso-Utility
Objective Minimise Cost Maximise Utility
Variable Quantities Utility
under study
Isocost lines Budget lines
represent costs that represent
Lines are to be budgets that are
in production theory in
consumer theory

Batch 2025-27 Dr. Kiran Hiremath - EM - Module 3 92

 Optimum Combination of Inputs
• The optimum quantity to be produced can be
identified using 2 curves
– Isoquant
– Isocost (budget line)
• The minimum cost is at the point where isoquant
curve is tangential to the isocost curve.
• The slope of the isoquant is given by the Marginal
Rate of Technical Substitution (MRTS)

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Batch 2025-27 Dr. Kiran Hiremath - EM - Module 3 94
• 𝑀𝑅𝑇𝑆 = 𝑀𝑃𝑙 /𝑀𝑃𝑘
• 𝑀𝑃𝑙 − 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑜𝑓 𝑙𝑎𝑏𝑜𝑢𝑟
• 𝑀𝑃𝑘 − 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑜𝑓 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

• The isoquant curve assists companies and

businesses in making adjustments to their
manufacturing operations, to produce the
most goods at the most minimal cost
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In Summary - Isoquant and isocosts
• An isoquant shows all combination of factors
that produce a certain output
• An isocost show all combinations of factors
that cost the same amount.
• Isocosts and isoquants can show the optimal
combination of factors of production to
produce the maximum output at minimum
cost.

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 Risk & Uncertainty
• Uncertainty is a situation regarding a variable
in which neither its probability distribution
nor its mode of occurrence is known.
• For instance, an oligopolist may be uncertain
with respect to the marketing strategies of his
competitors.

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 A few sources of uncertainty
1. Uncertain Pattern:
– We are definite about certain events but uncertain
about their pattern, for instance, there is sufficient
quantum of rainfall in a particular year but its
distribution over different months or days is
uncertain. So there is the chance for crop failure
by change in pattern of distribution of rains.

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2. Existing Facts and Future Plan:
• Our belief of certainty and uncertainty about
events is influenced by facts already available
and future plan.
• As for example in constructing a dam, we face
uncertainty about incoming water. But we
may plan our present need with provision for
future increase. The facts about past flow in
volume and size reduce uncertainty to a great
extent.
3. Bias of Self-Interest
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 Factors Determining Uncertainty:
• Uncertainty bearing has been considered as a
factor of production. It has a supply price
depending upon
i. The character of the entrepreneur
ii. On the amount of resources possessed by
him, and
iii. On the proportion of these resources
exposed to uncertainty.

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 THANK YOU

Batch 2025-27 Dr. Kiran Hiremath - EM - Module 3 101