PRODUCTION FUNCTION
Topics to be covered
1. PRODUCTION FUNCTION
2. TYPES OF PRODUCTION FUNCTION
3. TP,MP,AP
4. LAW OF VARIABLE PROPORTIONS
5. RELATION BETWEEN AP AND MP
6. RELATION BETWEEN TP AND MP
MEANING OF PRODUCTION :-
production means any process that converts a commodity or
commodities into a different commodity. Production refers to
transformation of inputs into output.
For example:
To manufacture shoes (output), we need various inputs like leather,
nails, land, labour, capital, services of entrepreneur etc.
MEANING OF PRODUCTION FUNCTION:-
There exists some relationship between inputs and output of a firm.
In Economics, such a relationship is known as production function.
The relationship between the maximum amount of output that can be
produced and the input required to make that output.
The production function specifies either the maximum output that
can be produced with the given inputs or the minimum quantity of
inputs needed to produce a given level of output.
Production function is not economical in nature as we do not consider
the value of inputs and output.
EQUATION OF PRODUCTION FUNCTION
TYPES OF PRODUCTION FUNCTION:-
SHORT RUN :- LONG RUN :-
SHORT RUN PRODUCTION FUNCTION:-
Period of time which is too short for a firm to install a new capital
equipment to increase production
It implies that capital is a fixed factor in short run . While varying
the amount of other factors ( labour & raw materials )
It is the subject matter of law of variable the proportion
LONG RUN PRODUCTION FUNCTION:-
The long run is a period of time ( or planning horizon ) in which all
the factors of production are variable.
It is a time period when the firm will be able to install new
machines & capital equipment apart from increasing the units of
labour.
It is the subject matter of law of return to scale
VARIABLE FACTORS AND FIXED FACTORS
Production is the result of combined efforts of the factors of
production. These factors are broadly classified as:
i) Variable Factors;
(ii) Fixed Factors.
(i) Variable Factors
Variable Factors refer to those factors, which can be changed in the
short run. For example, raw material, casual labour, power, fuel, etc.
Variable factors vary directly with the level of output. As output
increases, requirement for variable factors also rises and vice-versa.
It must be noted that variable factors are not required in case of
zero output.
(ii) Fixed factors
Fixed factors refer to those factors, which cannot be changed in
the short run. For example, plant and machinery, building, land, etc.
The quantity of fixed factors remain same in the short run
irrespective of level of output, i.e. they do not change, whether the
level of output rises, falls or becomes zero.
CONCEPT OF PRODUCT :-
Product or output refers to the volume of goods produced by a firm
or an industry during a specified period of time.
The concept of product can be looked at from three different angles:
(1) Total Product (TP)
(ii) Marginal Product (MP)
(iii) Average Product (AP)
(1) Total Product (TP)
Total product refers to total quantity of goods produced by a firm
during a given period of time with given number of inputs.
For example, if 10 labours produce 60 kg of rice, then total product
is 60 kg.
In the short run, a firm can expand TP by increasing only the
variable factors. However, in the long run, TP can be raised by
increasing both fixed and variable factors.
(2) Average Product (AP)
Average product refers to output per unit of variable input.
For example,
if total product (TP) is 60 kg of rice, produced by 10 labours
(variable input), then average product will be 60 ÷ 10 = 6 kg.
AP is obtained by dividing TP by units of variable factor.
Total Product (TP)
Average Product (AP)
Units of Variable Factor(Q)
(3) Marginal Product (MP)
Marginal Product refers to addition to total product, when one more
unit of variable factor is employed.
It measures extra output per extra unit of input holding all other
inputs fixed.
FORMULA :- Marginal Product (MP) MPn = TPn - TPn-1
CHANGE IN TOTAL PRODUCTS
Marginal Product (MP)
CHANGE IN UNIT OF VARIABLE FACTORS
PRODUCTION SCHEDULE
Quantity of Total Product Average Product Marginal Product Stage of production
labours (TP) (AP) (MP)
SATGE 1
SATGE 2
SATGE 3
PRODUCTION CURVE
STAGE-1 STAGE-2 STAGE-3
Increasing Diminishing Negative
Returns Returns Returns
Stage of production Total Product (TP) Marginal Produc(MP) Average Product(AP)
TP increases at MP rises & is maximum AP is rising.
increasing rate till POI corresponding to POI,
Increasing and the falls. Stage ends=
Returns After POI, TP increases
with decreasing rate. MP > AP, throughout.
AP is max &
AP = MP
Diminishing TP increases with
decreasing rate
MP is decreasing
but positive.
AP is decreasing
but positive.
Returns
Stage ends= TP is Stage ends= MP is 0
Max.
MP < AP, throughout.
Negative TP is decreasing MP is decreasing &
AP is decreasing but
positive.
Returns negaitive.
STAGE-1 STAGE-2 STAGE-3
Increasing Diminishing Negative
Returns Returns Returns
Increasing Diminishing Negative
Returns Returns Returns
Increasing Returns (IR)
Causes:
1. Specialization and division of labor
2. Economies of scale (larger production leads to lower costs)
3. Improved productivity due to better technology
4. Increased efficiency through standardized processes
5. Increased motivation and morale among workers
Diminishing Returns (DR)
Causes:
1. Overuse of variable input (e.g., labor)
2. Limited fixed inputs (e.g., capital, land)
3. Decreasing marginal productivity
4. Inefficient use of resources
5. Overcrowding or congestion
6. Technological limitations
Negative Returns (NR)
Causes:
1. Overproduction leading to waste and inefficiency
2. Excessive variable input usage (e.g., labor)
3. Poor resource allocation
4. Inadequate training or skill mismatch
5. Technological obsolescence
6. Insufficient maintenance or repair
7. Externalities (e.g., pollution, regulatory issues)
RELATION BETWEEN AVERAGE PRODUCTS AND MARGINAL PRODUCTS
FIXED FACTORS VARIABLE FACTORS AP ( UNITS ) MP ( UNITS )
1 0 - -
1 1 10 10
1 2 15 20
1 3 15 15
1 4 13 7
1 5 10.49 0
1 6 8 -4
The relationship can be summarised as under:
1. As long as MP is more than AP, AP rises,
2. When MP is equal to AP, AP is at its maximum,
3. When MP is less than AP, AP falls
4. Thereafter, both AP and MP fall, but MP becomes negative,
whereas, AP remains positive. MP falls at a faster rate in
comparison to fall in AP.
RELATION BETWEEN TOTAL PRODUCTS AND MARGINAL PRODUCTS
The relationship between IP and MP can be better understood with
the help of following schedule and diagram:
FIXED FACTORS VARIABLE FACTORS TP ( UNITS ) MP ( UNITS )
1 0 0 -
1 1 10 10
1 2 30 20
1 3 45 15
1 4 52 7
1 5 52 0
1 6 48 -4
The relationship between TP and MP can be summarised as under:
1. As long as TP increases at increasing rate (till point'P'), MP also
increases.
2. When TP increases at diminishing rate, MP decreases
3. When TP reaches its maximum point (point M),MP becomes zero
4. When TP starts decreasing, MP becomes negative,