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Production Function and Decision-Making Tools

The document discusses the production function as a decision-making tool, detailing the relationship between inputs and outputs in agricultural production. It distinguishes between short-run and long-run production scenarios, explains concepts such as marginal productivity, average productivity, and elasticity of production, and outlines cost concepts including break-even points and shutdown points. Additionally, it emphasizes the importance of optimizing input and output levels for profit maximization.

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pavithrapv45
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27 views14 pages

Production Function and Decision-Making Tools

The document discusses the production function as a decision-making tool, detailing the relationship between inputs and outputs in agricultural production. It distinguishes between short-run and long-run production scenarios, explains concepts such as marginal productivity, average productivity, and elasticity of production, and outlines cost concepts including break-even points and shutdown points. Additionally, it emphasizes the importance of optimizing input and output levels for profit maximization.

Uploaded by

pavithrapv45
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

PRODUCTION FUNCTION

DECISION MAKING TOOL


Mathematical expression or technical relationship between input
PRODUCTION FUNCTION and output

How changing the quantity of any input affects the total crop?
2
TYPES • Short run - at least one input is held at constant level ie., one input
is fixed.
• Long run - all inputs are variable.
• Continuous function: The doses or levels of input and output can be
split up into small units.
• Eg. Fertilizers or Seed
• Discontinuous or Discrete function: For input or factors or work
units which are used or done in whole numbers - one ploughing or
a number of ploughings.

SEED LAND
LABOUR
FACTOR - PRODUCT RELATIONSHIP

• Response of output with respect to single input. [Link]. Input (kg) Output (kg) MP

1 10 100 -
I. Constant rate of return
2 20 200 10
II. Increasing rate of return
3 30 350 15
III. Decreasing rate of return
4 40 520 17
• Marginal productivity of the variable input determines the
5 50 690 17
type relationship.
6 60 810 12
• MP = additional output from additional input
7 70 900 9
PHYSICAL PRODUCTS

• TPP: Quantity of physical output (Y) obtained at


different levels of variable input (X).

• MPP: Additional output from each successive unit


of variable input or change in the TPP ( ΔY ) with
respect to one unit increase in variable input (ΔX )
ie Δ Y / Δ X .

• APP: Average amount of output produced per unit


of input. Ratio of output to input (Y/X). Average
efficiency with which a variable input is
transformed in to output.

• Elasticity of Production (EP): Percentage change in


output in response to a percentage change in
variable input. 5
Law of diminishing marginal returns

I II III
MPP=APP MPP = 0 MPP = -ve
APP = Max. TPP = Max. TPP = decrease
Output in kg (TPP)

1200

Input Output (TPP) APP MPP Zone 1000

10 100 - -
800
20 200 10 10
600
30 330 11 13
400

40 480 12 15 Irrational
Ep > 1 200

50 650 13 17
0
10 20 30 40 50 60 70 80 90 100 110

60 820 13.7 17
20

70 940 13.4 12
15
Rational
80 1030 12.9 9 Ep < 1 but 10
+ve
5
90 1030 11.4 0
0
100 980 9.8 -5 Irrational 10 20 30 40 50 60 70 80 90 100

110 880 8 -10 Ep < 0 -5

Rational zone: Consider input cost, output -10


price, demand and supply conditions
-15

APP - MPP -
Decision rule for Profit Maximization

Determination of Optimum Level of Determination of Optimum Level


Input of Output

Marginal Revenue (MR) =


Marginal Value Product (MVP) of Marginal Cost (MC)
input = Marginal Input Cost (MIC)

MR = ΔTR/ΔY
MVP = ΔTR/ΔX
MC = ΔTC/ΔY
MIC = ΔTC/ΔX

8
COST CONCEPTS
MIRROR PRODUCT ION CURVE

9
Short run: Variable + Fixed – one production season
TYPES… Long run: Variable – beyond a season or year

10
SHORT RUN COST Total Cost Fixed Cost Variable cost
Average Cost = TC/Y Avg FC = FC/Y Avg VC = VC/Y
Marginal Cost = ΔTC/ΔY

11
Break Even Point
• No profit – No loss.

• Costs are covered.

• Only beyond that, the farmer make profits.

SHUT DOWN POINT OR PRICE


• AR > ATC - Profit

• AVC < AR < ATC – Continue production (Cover VC)

• AR ≤ AVC – Loss – Stop production


LONG RUN COST
PL ANNING CURVE, ENVELOPE CURVE OR SCALE CURVE

• All inputs – varied


• Only variable cost

M = optimum plant size = Min. AC


14

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