Production and

Cost
NCERT Chapter – 3
Introductory Microeconomics
Production
Function and
Return to a
Factor
What Production is
It is a process of using some inputs and converting them into output

It is a Process of converting raw material into Finished Goods

It is a Process of Manufacturing

It is a Process of Producing
 Outcome
“Production Finished Goods
is Outcome
of Some • Land
Inputs” • Labour
• Machines
• Capital
 Production of Goods
Like:- Shirts

Production Production of Services

Includes Like: Telecom Services

Production of Crops
Like:- Wheat
 Production Function is a
relation between input and
output

Production Which describes how much

input is required to produce a
Function particular quantity of a product
• “Production Function is a Functional
relation between input and output
which describes how much inputs are
required to produce a particular
quantity of a product”
 Qx = f(L,K)

Qx = Output of X-Commodity

F = Function of

Equation L = Labour

K = Capital

Output of X-Commodity is a function

of Labour and Capital as an input
For Example
If we say 10 units of Capital and 5 units of labour is required to produce 100
units of Product.

Then the Production function is represented as:-

100x = f(5L,10K)

EXPLANATION:- producing 100 units of commodities as an output is a relation of

10 units of capital and 5 units of land as an input
• Production Function is a Concept of Economics!
• How an Economist Find out how much input is required to get
output in particular quantity

Possibly Not
It is not a concept of Economic Relation, as an economist never
knows:-

How Much Input = How Much Output

It is a Technical Relation
• As it is a work of engineers, who can understand it perfectly and
describe how much input is required to produce how much quantity

• “The production function is purely a technical relation which connects

factor inputs and outputs”
 Production Function is an Estimate
• It is not always true
• It has various factors which will affect the result
a) Change in Technology
b) Increase in Knowledge
c) Efficient Work Force
Factors of Production
❖Factors of Production means those things which are used as an input in
the production process.
❖Every production unit has different Factors of Production

Land Labour Capital Machines

Building
 Classification of Factors of Production

▪ Those Factors which remain fixed ▪ Those Factors which changes

▪ Does not changes with the change ▪ Changes with the change in level of
in output output
▪ Land, Machines, Buildings etc. ▪ Like Labour, Electricity Bill etc.
Example
Manufacturing of a Shirt Includes Both Factors
• Raw Material Like
a) Fiber
b) Threads
c) Buttons
• Processing Materials Packing Materials
a) Land a) Outer Layer
b) Inner Layer
b) Labour
c) Machines – For Cutting,
Assembling, Coloring
d) Building
e) Oiling
f) Energy
 Short Run V/s Long Run

Short Run means a period of short term

Under this situation it is not possible for everyone to :-
• New Machines
• Purchase new technologies
• Purchase new Buildings
Hence for short terms there are some factors which is very difficult to
change hence they are called as Fixed Factors of Production
Long Run means a Period of Long Term

Under long term nothing is fixed as we are

having long period everyone can make
changes in the factors of Production
 Let’s Have a Close look
Variable Factor of Fixed Factors of
Production Production
• Labour • Land
• Raw Material • Machine
• Energy • Capital
 Labour Capital Production
0 10 0
1 10 50
2 10 90
3 10 120
4 10 140
5 10 150
6 10 150
7 10 147
8 10 135
9 10 120
10 10 100

1202

Sum total of all these productions at different level of variable factors is called
as Total Product
• Observations:

• Production involves application of Fixed as well as variable factor of Production.

• Labour is a variable factor which can be changes in short run as per the requirements

• Capital is a fixed factor which cannot be changes in short run

• Hence, to increase productivity one is dependent on variable factors which can be used to
increase the productivity
 Labour Unit Can be Zero

It shows that no production work is going on in the work place

That’s why unit of labour can be zero

Production Can also be Zero

• If unit of labour is zero, means no work is going on then
• The production can also be zero

With the increase in the unit of labour there is increase in the

production
 Unit of Capital Can Be Zero?

No Business No Production No Investment No Capital

Hence Fixed Factors Can Never be Zero

 Fixed Factors of Production can never be zero
 They are must to establish production unit

 If your labour unit is zero then it means there is no production

work hence production can be zero
 • But Fixed factors are must they cannot be
zero.
• Even when there is no production you
need to bear fixed expenses

• “Hence, Number of Labour unit and

Production can starts from zero but fixed
factors of production can never be zero as
we need to still bear those expenses even
when there is no production work is going
on”’
Marginal Product
• Marginal Means Change
• Marginal Product Means Change in
Production

• “Marginal Product Means Changes in the

Total Product with the addition of one more
unit of Variable Factor”
T.P. at 4 units of T.P. at 3 Units of
Labour
Change in T.P.
Labour

MP = 140 - 120 = 20

Hence, change in the total product with addition of one more unit of
variable factor is called as marginal product.
Labour Capital T.P. M.P. Changes
0 10 0 - -
1 10 50 50 50-0
2 10 90 40 90-50
3 10 120 30 120-90
4 10 140 20 140-120
5 10 150 10 150-140
6 10 150 0 150-150
7 10 147 -3 147-150
8 10 135 -12 135-147
9 10 120 -15 120-135
10 10 100 -20 100-120

1202
Is there any relation between T.P. and
M.P.

• A big YES
• Yes there is relation between T.P. and M.P.
• Both can be derived from each other
• It means if TP is given we can calculate
MP
• And if MP is given then we can calculate
TP
Units T.P. M.P. Units M.P.
0 0 0 -
1 50 1 50
2 90 2 40
3 120 3 30
4 140 4 20
5 150 5 10
6 150 6 0
7 147 7 -3
8 135 8 -12
9 120 9 -15
Average Product
• Average Product is the average of total product

• Which calculates the average production by dividing the

total product with corresponding units of labour
Labour Capital T.P. A.P.
0 10 0 -
1 10 50 50
2 10 90 45
3 10 120 40
4 10 140 35
5 10 150 30
6 10 150 25
7 10 147 21
8 10 135 16.87
9 10 120 13.33
10 10 100 10

1202
 T.P. and A.P. Both are Positive But
Why M.P. is Negative

• T.P. can never be negative as it is the Production of

goods
• We cannot say we have produce -10 units
• A.P. can never be negative as it is the average of total
product
• Hence, if T.P. can never be negative then A.P. also.
MP Can be Negative
• As with the increase in the number of labour and
employees
• The efficiency of the worker will decreases

• A work place where 10 workers are sufficient but we are

employing 20 workers then the result will be declining.
Note the Synonyms
• T.P. = Total Physical Product
• M.P. = Marginal Physical Product
• A.P. = Average Physical Product
RELATION BETWEEN TP AND MP
Units of Lands Units of Labour T.P. M.P.
(Fixed Factor) (Variable (Output of (Change in
(Hectares) Factor) Wheat) total Output
(No. of (In Tonnes) of Wheat)
Workers)
1 0 0
1 1 6
1 2 20
1 3 48
1 4 72
1 5 80
1 6 84
1 7 84
1 8 80
 Relation Between T.P and M.P
90
84 84
80 80 80

70 72

60

50
48
40

30
28
24
20 20
14
10
6 8
4
0 0 0
0 1 2 3 4 5 6 7 -4
8
-10
Total Product Marginal Product
In the beginning T.P. and M.P starts from same point

When M.P is increasing T.P is also increasing at increasing rate

When M.P starts declining T.P is still increasing but at decreasing rate

When M.P is zero there is no change in T.P. At this point T.P. is Maximum and
Highest

When M.P is negative, TP starts decline

 Relation Between AP and MP
Units of Lands Units of Labour M.P. A.P.
(Fixed Factor) (Variable Factor) (Change in total (Average of
(Hectares) (No. of Workers) Output of Wheat) Wheat)
1 0 - -
1 1 6 6
1 2 14 10
1 3 28 16
1 4 24 18
1 5 8 16
1 6 4 14
1 7 0 12
1 8 -4 10
 Relation Between M.P. and A.P.
30
28
25
24
20
18
15 16 16
14 14
12
10 10 10
8
5 6
4
0 0
1 2 3 4 5 6 7 8 9
-5 -4

-10
Marginal Product Average Product
1. Initially both MP and AP are increasing but MP>AP
2. After that both MP and AP starts declining but now MP < AP
3. MP curve cuts AP when AP is maximum (MP curve cuts AP curve from its
top)
4. MP can be zero, but AP cannot be Zero
5. MP can be negative, but AP cannot be negative
Do you agree that TP must decrease in a situation of
Diminishing return

No, as diminishing return means we still getting some

return although the rate of return is declining

Decreasing Return means MP is decreasing but, in this

condition, TP is still increasing at decreasing rate.
Should both TP and MP be declining in a situation of diminishing
return?

Under diminishing return only MP is decreasing.

Under diminishing return TP is still increasing though at

decreasing rate.
Situation of constant return

It is a situation when business is getting constant return to

their factors. Under this situation there is no increase in the
TP as the rate of change(MP) is zero.

It is a situation when MP is zero, which shows that:

1. With the increase in variable factor there is no change in
TP
2. Under this situation TP is maximum and constant
 Introduction

Return Every businessman establishes

to the production unit to get
something in return.
Factors So, it is important to
understand the behavior of the
return for a producer
Return to Factor
Return to Factor means the rate of return that we are getting with the
use of inputs in the form of output.

10 units of Labour and 1 unit of Capital = 40 units of Output

 Return to Factor
Conversion of Input into Output

- Fixed Factors of Production - Finished Goods

- Variable Factors of Production

Hence, Return to Factor means number of units produced using fixed

as well as variable factors of production
 Law of Variable Proportion
• Law of Variable proportion is the law which describes the
behavior of return.
• It helps in understanding the Rate of Return

Law of Variable proportion states that as more and more variable

factors are combined with the fixed factor,
1) Initially we are getting increasing return at increasing rate
2) Then increasing return but at decreasing rate
3) At last a stage may came when we are getting decreasing
returns
Unit of Land Units of Labour Total Product Marginal
Product
1 1 2 2
1 2 4 3
1 3 9 4
1 4 12 3
1 5 14 2
1 6 15 1
1 7 15 0
1 8 14 -1
1 9 12 -2
Observations

1. Initially when we are increasing the variable factors (Labour) we are

getting increasing return

TP is increasing at increasing rate called as increasing return

2. After the 3rd unit of labour if we still increases variable factor then we
will getting increasing return by at decreasing rate.

TP is still increasing but at decreasing rate

3. After that we are getting constant return that means there is no
increase or decrease in the output.

TP is constant at 6th and 7th unit of labour

4. If we are still increasing the participation of Variable factors then a time

may came when we are getting negative return

TP starts declining called as negative returns

 Total Production
16

14

12

10

8
Total Production
6

0
1 2 3 4 5 6 7 8 9
 Total Production
20
15
10
Total Production
5
0
1 2 3 4 5 6 7 8 9

Marginal Product
6
4
Axis Title

2
Marginal Product
0
-2 1 2 3 4 5 6 7 8 9
-4
 1. Underutilisation of the Fixed Assets

In the beginning we are getting increasing

returns because fixed assets are not fully
Causes of utilized

Increasing 2. Increasing Efficiency of the Variable Factors

Return
Initial increase in the variable factor will leads
to division of work between the labour.
Hence there is increasing return
3. Better Co-ordination between the factors

So, long fixed factors are underutilised the increase in the variable factors
will leads to increase in the output.
Hence Increasing Return
 1. Overutilisation of Fixed Factors

Decreasing Now, fixed factors are fully utilised for the

production and if we still increases the variable
Return factors then it will decreases the efficiency.

Hence, decreasing return

2. Imperfect Substitutes for each other

Variable and fixed factors of production are not the substitute of each
other.
It means we cannot always increase the variable factor to increase the
production.
There is a limit up to which we are getting increasing return.
3. Poor coordination between factors of
production

As there is limit up to which we can increase the

variable factor but if we are still increasing them
after that limit then there will be poor
coordination between the factors.
Hence decreasing returns
Real Life Example
Imagine you are studying to take a test.
1st Stage:- Let’s assume that you can learn everything in about 5
hours of study. The first 5 hours of studying will have a greater
impact on your test score.

2nd Stage:- If you still continue your study for next 5 hours then the
impact of another 5 hours will be less as compare to the first 5 hours.

3rd Stage:-And after certain point of time any extra study will be the
wastage of time because you already knows the material/concepts
 Assumptions of the Law
There are certain assumptions if these assumptions are fulfilled then only
this law will be applied:-

1) Short Run Period:- In which some factors are variable and some are
fixed.
2) Variable factors are of similar nature (homogeneous)
3) No change in technology or fixed factor of production
Postponement of the Law

The applicability of law can be postponed under following

situations:-

1. There is change in fixed factors of production (Change in

Technology)
2. Discovery of substitute for the fixed factors of
production