PRODUCTION FUNCTION

PRODUCTION FUNCTION
Production function is an expression of the
technological relation between physical inputs
and output of a good.
SHORT RUN AND LONG RUN
The functional relationship between changes in
output due to change in inputs is studied in two
phases: Short run and Long run time periods.
SHORT RUN
Short run 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.
It means, production can be raised by
increasing variable factors, but till the extent
of capacity of fixed factors.
LONG RUN
Long run refers to a period in which output can
be changed by changing all factors of
production.

Long run is a period, that is long enough for

the firm to adjust all its inputs according to
change in the conditions.
In the long run, firm can change its factory
size, switch to new techniques of production,
purchase new machinery, etc.
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
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, requirements for
variable factors also rises and vice-versa. It
must be noted variable factors are not
required in case of zero output.
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.
TYPES OF PRODUCTION FUNCTION

The distinction between fixed and variable

factors helps us to study the two types of
production function:
RETURNS TO A FACTOR: LAW OF
VARIABLE PROPORTIONS
Returns to a factor refers to the resultant
increase in the total product (return) when
only one factor is increased, keeping all other
factors fixed.
STATEMENT OF LAW OF VARIABLE
PROPORTIONS
Law of Variable Proportions (LVP) states that
as we increase quantity of one input keeping
other inputs fixed, total product (TP) initially
increases at an increasing rate, then at a
decreasing rate and finally at a negative rate.
ASSUMPTIONS OF LAW OF VARIABLE
PROPORTIONS
1. It operates in short run, as factors are
classified as variable and fixed factor;
2. Under Law of Variable Proportions, different
units of variable factor can be combined
with fixed factor;
3. The state of technology is assumed to be
constant during the operation of this law.
4. It is assumed that all variable factors are
equally efficient.
LET US NOW UNDERSTAND THE LAW
WITH THE HELP OF EXAMPLE
As seen in Table and Fig
when farmer increases the
labour on the same piece of
land, then , initially TP rises
at an increasing rate, then
at a decreasing rate and
finally, it falls. The resulting
relation between input and
output is discussed in three
phases.
 PHASE - I
1. Increasing Returns to a factor: In the first phase, every
additional variable factor adds more and more to the
total output. It means TP increases at an increasing rate
and MP of each variable factor rises. ;
• It happens because initially quantity of variable input is
too small as compared to the fixed input. As production
starts, there is efficient use of fixed input which raises
the productivity of variable input due to division of
labour.
• As seen in given schedule and diagram , onle labour
produces 10 units, while two labours produce 30 units. It
implies, TP increases at increasing rate (till point ‘Q’)
and MP rises till it reaches its maximum point ‘P”, which
marks the end of first phase.
 PHASE - II
2. Diminishing Returns to a factor: In the second phase,
every additional variable factor adds lesser and lesser
amount of output. It means TP increases at a
diminishing rate and MP falls with increase in variable
factor.
• It happens because after a level of output, pressure on
fixed input leads to a fall in the productivity of the
variable input.
• The second has ends at point ‘S’ when MP is zero and TP
is maximum (point ‘M’) at 52 units.
• 2nd phase is very crucial as a rational producer will
always aim to produce in this phase because TP is
maximum and MP of each variable factor is positive.
 PHASE - III
3. Negative Returns to a factor: In the third phase (starting
from 6 units of labour), the employment of additional
variable factor causes TP to decline. MP now becomes
negative. Therefore, this phase is known as negative
returns to a factor.
• It happens because the amount of variable input
becomes too large in comparison to the fixed input
which leads to a decline in TP.
• In fig , the third phase starts after pint ‘S’ on MP curve &
point ‘M’ on TP curve.
• MP of each variable factor is negative in the 3rd phase. So
no firm would deliberately choose to operate in this
phase.
 PHASE OF OPERATION
A rational producer will always seek to operate in Phase II of
Law of Variable Proportions.
• In Phase I, employment of every additional units of
variable factor gives more and more output i.e. marginal
product increases. It means, there is scope for more
profits, if production is increased with more units of
variable factor.
• In Phase III, marginal product of each variable factor is
negative. So, this phase is ruled out on the grounds of
technical inefficiency and a rational producer will never
produce in the third phase.
This brings us to the conclusion that a producer will aim jto
operate in Phase II, as TP is maximum and MPj of each
variable factor is positive.
REASONS FOR LAW OF VARIABLE
PROPORTIONS
The various reasons for 3 phases of Law of Variable
Proportions are:
Reasons for Increasing Returns to a Factor (Phase I)
There are three important reasons for the operation
of increasing returns to a factor:
1. Better Utilization of the Fixed Factor: In the first
phase, the supply of the fixed factor (say, land) is
too large, whereas variable factors are too few.
So, the fixed factor is not fully utilised. When
variable factors are increased and combined with
fixed factor, then fixed factor is better utilised and
output increases at an increasing rate.
2. Increased Efficiency of Variable Factor: When
variable factors are increased and combined
with the fixed factor, then former is utilised in a
more efficient manner. At the same time, there
is greater cooperation and high degree of
specialization between different units of the
variable factor.
REASONS FOR DIMINISHING RETURNS
TO A FACTOR (PHASE II)
The main reasons for occurrence of diminishing
returns to a factor are:
1. Optimum Combination of Factors: Among the
different combinations between variable and
fixed factor, there is one optimum combination,
at which total product (TP) is maximum. After
making the optimum use of fixed factor, the
marginal return of variable factor begins to
diminish. For example, if a machinery (fixed
factor) is at its optimum use, when 4 labours are
employed, then addition of one more labour will
increase TP by very less amount and MP will start
diminishing.
2. Over-utilization of Fixed Factor : As we keep on
increasing the variable factor, eventually a
position comes when the fixed factor has its
limits and starts yielding diminishing returns.
3. Imperfect Substitutes: Diminishing returns to a
factor occurs because fixed and variable factors
are imperfect substitutes of one another. There is
a limit to the extent of which one factor of
production can be substituted for another. For
example, labour can be substituted in place of
capital or capital can be substituted in place of
labour till a particular limit. But, beyond the
optimum limit, they become imperfect
substitutes of one another, which leads to
diminishing returns.
 REASONS FOR NEGATIVE RETURNS TO A
FACTOR (PHASE III)
The main reasons for occurrence of negative returns to a
factor are:
1. Limitation of Fixed Factor: The negative returns to a factor
apply because some factors of production are of fixed
nature, which cannot be increased with increase in
variable factor in the short run.
2. Poor Coordination between Variable and Fixed Factor:
When variable factor becomes too excessive in relation
to fixed factor, then they obstruct each other. It leads to
poor coordination between variable and fixed factor. As a
result, total output falls instead of rising and marginal
product becomes negative .
3. Decrease in Efficiency of Variable Factor: With
continuous increase in variable factor, the
advantages of specialization and division of
labour start diminishing. It results in
inefficiencies of variable factor, which is
another reason for the negative returns to
eventually set in.
Law of Variable Proportions is an extension of
another famous law, known as ‘Law of
Diminishing Returns’.
RELATIONSHIP BETWEEN TP AND MP
The relationship can be
summarised as under:
1. As long as MP is more than
AP, AP rises, i.e. up to 2nd
unit of variable factor.
2. When MP is equal to AP, AP is
at its maximum, i.e. at 3rd
unit of variable factor.
3. When MP is less than AP,
AP falls (from 4th unit of
variable factor).
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.
RELATIONSHIP BETWEEN AP AND MP
The relationship can be
summarised as under:
1. As long as MP is more than
AP, AP rises, i.e. up to 2nd
unit of variable factor.
2. When MP is equal to AP, AP is
at its maximum, i.e. at 3rd
unit of variable factor.
3. When MP is less than AP, AP
falls (from 4th unit of
variable factor).
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.
 QUESTIONS
1. Calculate Average Product (AP) and Marginal
Product (MP).
Variable 0 1 2 3 4 5
Factors
Total 0 8 20 28 39 25
Products
2. Calculate AP and MP from the following
particulars.
Land 1 1 1 1 1 1 1 1 1 1

Labour 0 1 2 3 4 5 6 7 8 9

TP 0 20 50 90 120 140 150 150 140 120

(units)