UNIT 3 - PRODUCTION FUNCTION
PRODUCTION FUNCTION
*It is an expression of the functional relationship between physical inputs and output of a good.
Ox =f(i1,i2,……………….in)
*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.
SHORT RUN AND LONG RUN
Short run
*It refers to a period in which output can be changed by changing only variable factors.
*In the short run, fixed inputs like plant ,machinery ,building etc cannot be changed.
* So,in the short run,some factors are fixed and some are variable factors.
Long run.
*it refers to a period in which output can be changed by changing all the factors of production.
*this period is long enough for the firm to adjust all its inputs according to change in the conditions.
*all the factors are variable in the long [Link] firm can change its factory size,purchase new machinery etc.
VARIABLE FACTORS AND FIXED FACTORS
Fixed factors.
*it refers to those factors ,which cannot be changed in the short run.
*they do not vary directly with output.
*for eg,building,plant and machinery,permanent staff etc.
Variable factors
*it refers to those factors,which can be changed in the short run.
*they vary directly with output.
*for eg,raw materials,casual labour,fuel etc.
PRODUCT – refers to the volume of goods produced by a firm or industry during a specific period of time.
1. TOTAL PRODUCT [Link] PRODUCT [Link] PRODUCT
TOTAL PRODUCT
Total product refers to the total quantity of goods produced by a firm during a given period of time with
given number of outputs.
AVERAGE PRODUCT
Average product refers to output per unit of variable input.
MARGINAL PRODUCT
It refers to the addition to total product,when one more unit of variable input is employed.
Relationship between TP and MP
capital labour TP MP
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
*When TP increases at an increasing rate,MP also increases.i.e till 2 units of labour.
*When TP increases at an decreasing rate,MP decreases.i.e till 5 units of labour.
*When TP reaches its maximum point,MP becomes negative,i.e at 5th unit.
*When TP decreases,MP becomes negative,i.e from 6 th unit of labour.
Relationship between MP and AP.
capital labour MP AP
1 0 - -
1 1 10 10
1 2 20 15
1 3 15 15
1 4 7 13
1 5 0 10.4
1 6 -4 8
*As long as MP is more than AP,AP rises ,i.e upto 2 nd unit of labour.
*When MP is equal to AP,AP becomes maximum,i.e at the 3rd unit of labour.
*When MP is less than AP,AP falls,i.e from the 4th unit of labour.
*AP remains positive but MP becomes negative.
2. Decreasing returns to factor:
At optimum combination of factors, TP is maximized. After this marginal product starts
diminishing.
Fixed and variable factors are imperfect substitutes of one another. They can be substituted
upto a limit but after that it leads to diminishing returns.
3. Negative returns to factor:
Limitation of fixed factors.
Poor coordination between variable and fixed factors.
Decrease in efficiency of variable factors.
Laws of returns to scale.
Returns to scale refers the change in output when all factor inputs are changed simultaneously in the same
proportions in the long run.
Three stages of returns to scale:
1. Increasing returns to scale
When proportionate increase in total output is more than proportionate increase in inputs, it is
increasing returns to scale.
Inputs Output % increase in input % increase in output
1K + 2L 100 -- --
2K + 4L 250 100% 150%
In the given example,if all inputs are increased by 100 %,then the output increases more than the
percentage change in input [ 150% ]
2. Constant returns to scale:
When proportionate increase in output is equal to proportionate increase in inputs, it is constant
returns to scale.
Inputs Output % increase in % increase in
input output
1K + 2L 100 -- --
2K + 4L 200 100% 100%
In the given example,if all inputs are increased by 100 %,then the output also increases by 100%
.
3. Decreasing returns to scale:
When proportionate increase in total output is less than proportionate increase in inputs, it is
decreasing returns to scale.
Inputs Output % increase in input % increase in output
1K + 2L 100 -- --
2K + 4L 175 100% 75%
In the given example, if all inputs are increased by 100 %,then the output increases less than the
percentage change in input [ 75% ]
________________________________________________________________