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AD PRODUCTION
FUNCTION
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CLASS-XI
Introductory
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Microeconomics
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☆ Production is the process by which inputs are transformed into ‘output’.
Production is carried out by producers or firms. A firm acquires different inputs like
labour, machines, land, raw materials etc. It uses these inputs to produce output. This
output can be consumed by consumers, or used by other firms for further [Link]

1. PRODUCTION FUNCTION
Physical inputs are used in the production function. A firm's production function
describes the relationship between output and production factors used in the

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manufacturing process. It displays the number of inputs required to produce the highest
level of final output.

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Symbolically: OX = f (i1, i2, i3 ………..in)
Where:
OX = Output of commodity x;
f = Functional relationship;
i1, i2, i3 ………..in = Inputs needed for Ox

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1.1 Example of Production function
Suppose a firm is manufacturing chairs with the help of two inputs, say labour (L) and
capital (K). Then, production function can be written as: 0Chairs = f(L, K)
Production function defines the maximum chairs ( 0Chairs ), which can be produced with
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the given capital and labour inputs. If production function is expressed as: 250 = (7L,
2K). It means, 7 units of labour and 2 units of capital can produce maximum of 250
chairs.

1.2 TYPES OF PRODUCTION FUNCTION:

There are two types of Production Function.
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1. Short-run Production Function: In this production function, one production factor is

variable while the others are fixed. As a result, the law of return to a factor is applied. It
is also referred to as the variable proportion type of production function.
It is a time frame that is insufficient to effect change in all inputs. The variable factors in
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this level of production can be changed.

2. Long-run Production Function: All production factors are variable in this production
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function. As a result, the law of diminishing returns to scale is applied. It is also referred
to as the constant proportion type of production function. It is a time period long enough
to change all inputs, and all inputs are variable in the long run.

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 Difference between Short Run and Long Run

Basis Short run Long run

Meaning Short run refers to a period in which Long run refers to a period in
output can be changed by changing which output can be changed
only variable factors. by changing all factors of
production.

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Classification Factors are classified as variable All factors are variable in the
and fixed factor in the short run. long run.

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Price In the short run, demand is more In the long run, both demand
determination active in price determination as and supply play equal role in
supply cannot be increased price determination as both
immediately with increase in can be increased.
demand.

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2. 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.
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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
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not required in case of zero output.

FIXED FACTORS
Fixed factors refer to those factors, which cannot be changed in the short run. For
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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.
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REMARKS

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3. TOTAL PRODUCT OR TOTAL PHYSICAL PRODUCT
Total product is the sum of the final units of output produced by a firm using a given
amount of inputs over a given time period. When all other factors of production are held
constant, total product is the relationship between variable factors of production and
final units of output. The total product can be expressed using the formula below:

Total Product = ∑QX

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The formula above depicts the relationship between variable factors of production and
the total output:

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4. AVERAGE PRODUCT
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The average production is the variable factor's per unit production.
𝑇𝑃
𝐴𝑃 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐼𝑛𝑝𝑢𝑡
TP in terms of AP will be:
TP = AP X Units of Variable Factor
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5. MARGINAL PRODUCT
It refers to the change in total product resulting from the employment of an additional
unit of variable factor. In other words, it is the contribution of each additional unit of
variable factor to output.
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𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡

𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑜𝑓 𝑎𝑛 𝐼𝑛𝑝𝑢𝑡 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐼𝑛𝑝𝑢𝑡
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6. RELATION BETWEEN TOTAL, AVERAGE AND MARGINAL PRODUCT
∆𝑇𝑃
𝑀𝑃 = ∆𝐿
MPn = TPn – TPn-1

1. When TP rises at an increasing rate, MP rises as well.

2. MP decreases as TP increases at a decreasing rate.
3. When TP is at its maximum, MP equals zero.

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4. When TP starts to fall, MP becomes negative

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Labour MP TP AP

1 2 2 2

2 3 5 2.5

3 4 9 3

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1
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2.6

6 0 13 2.16
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7 -2 11 1.6

1. When MP is greater than AP, AP increases.

2. When MP equals to AP, AP is maximum and constant.
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3. When MP is less than AP, AP decreases.

4. MP can be zero or negative, but AP remains positive.
5. AP rises even when MP falls, but MP should be higher than AP.
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7. RETURNS TO A FACTOR: It describes the output behavior when only one variable
factor of production is increased in the short run while fixed factors remain constant.

8. LAW OF VARIABLE PROPORTION: The law of variable proportion states that when
more and more units of variable factors are used to increase output, output initially
increases at an increasing rate before falling.

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1. Stage I (Stage of Increasing Return to factor): TP Increases at an ever increasing

rate: Initially, as more units of variable factors are combined with fixed factors, total
physical production increases at an increasing rate, and MP rises. It happens because
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initially quantity of variable input is too small as compared to the fixed input. As
production starts, there is efficient use of the fixed input, which raises the productivity of
variable input due to division of labour.
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The following are the reasons for the increased return:.

(a) Underutilisation of fixed factor: When variable factors are increased and
combined with fixed factor, then fixed factor is better utilized and output increases at an
increasing rate.
(b) Increased efficiency of variable factors: There is greater cooperation and high
degree of specialization between different units of the variable factor.

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(c) Indivisibility of fixed factors: Once an investment is made in indivisible fixed
factor, then addition of more and more units of variable factor, improves the utilization of
fixed factor. The increasing returns apply as long as the optimum level of combination
between variable and fixed factor is achieved.

2. Stage II (Stage of Diminishing Return to factor): TP increases at a decreasing

rate: As more units of variable factors are combined with fixed factors, total product

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increases at a decreasing rate, while MP decreases but remains positive. At the end of
this phase, TP is at its maximum and MP is zero. It happens because after a level of

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output, pressure on fixed input leads to fall in productivity of the variable input.
The cause of diminishing returns is:
(a) Optimum combination of factors: Among the different combinations between
variable and fixed factor, there is one optimum combination, at which TP is maximum.
After making the optimum use of fixed factor, the marginal return of variable factor
begins to diminish.

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(b) Imperfect substitutes: Diminishing returns to a factor occurs because fixed and
variable factors are imperfect substitutes of one another.

3. Stage III (Stage of negative return to factor): TP falls: As more units of variable
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factors are combined with fixed factors, total output begins to fall and marginal product
becomes negative. It happens because the amount of variable input becomes too large
in comparison to the fixed input which leads to decline in TP.
Cause of negative return:
(a) Limitation of fixed factors: This phase applies because some factors of production
are of fixed nature, which cannot be increased with increase in variable factor in the
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short run.
(b) Poor coordination between variable and fixed factors: When variable factor
becomes too excessive in relation to fixed factor, they obstruct each other. It leads to
poor coordination between variable and fixed factors.
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(c) Decrease in efficiency of variable factors: With continuous increase in variable

factor, the advantages of specialization and division of labor start diminishing. It results
in inefficiencies of variable factor, which is another reason for negative return to
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eventually set in.

Point of Inflexion: A point from where the slope of TP curve changes is known as
point of inflexion. Till the point of inflexion, TP increases at an increasing rate, and
from this point downwards, it increases at a diminishing rate.
REMARKS

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Example
Suppose, a farmer has 1 acre of land (fixed factor) on which he wants to increase the
production of wheat with the help of labour (variable factor). When he employed more
and more units of labour, initially output increased at an increasing rate, then at a
decreasing rate and finally, at a negative rate. This behaviour of output is shown in
Table below;

Law of Variable Proportions

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Fixed Factor Variable Factor TP MP Phase
(Land in acres) (Labour) (units) (units)

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1 1 10 10 Phase I: Increasing Returns
1 2 30 20 to a Factor

1 3 45 15

1
4

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52
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Phase II: Diminishing
Returns to a Factor

1 6 48 –4 Phase III: Negative Returns

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to a Factor

Factor ratio keeps on changing: It must be noted that production is carried out under
conditions of ‘Variable Proportions’, i.e. proportion between fixed and variable factor
changes with every additional variable factor. In Table 5.1, the ratio between land and
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labour changes from 1:1 to 1:2, then to 1:3 and so on, with addition of more and more
units of labour.

8.2 Phase of Operation

A rational producer will always seek to operate in Phase II of Law of Variable
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Proportions.
• In Phase I, employment of every additional unit of variable factor gives more and more
output i.e. marginal product increases. It means, there is scope for more profits, if
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production is increased with more units of variable factor.

• In Phase III, the marginal product of each variable factor is negative. So, this phase is
ruled out on the ground 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 to operate in Phase II, as TP is
maximum and MP of each variable factor is positive.

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9. RETURNS TO SCALE
When a proportional increase in all inputs results in an increase in output by the same
proportion, the production function is said to display Constant returns to scale (CRS).
Example:
Inputs (Units) Output Percentage Percentage
(K = Capital, L = (Units) Increase Increase
Labour) in Inputs in Outputs

6K + 12L 600 – –

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8K + 16L 1,000 100% 100%

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10K + 20L 2,300 100% 100%

When a proportional increase in all inputs results in an increase in output by a larger

proportion, the production function is said to display Increasing Returns to Scale (IRS)
Example:
Inputs (Units)
(K = Capital, L =
Labour)
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Output
(Units)
Percentage
Increase
in Inputs
Percentage
Increase
in Outputs

2K + 4L 200 – –
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4K + 8L 450 100% 160%

6K + 12L 600 100% 120%

Decreasing Returns to Scale (DRS) holds when a proportional increase in all inputs
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results in an increase in output by a smaller [Link]:

Inputs (Units) Output Percentage Percentage
(K = Capital, L = (Units) Increase Increase
Labour) in Inputs in Outputs
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10K + 20L 2,300 – –

12K + 24L 4,600 100% 80%

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14K + 28L 6,000 100% 75%

REMARKS

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 Practicals on TP, AP and MP
Example 1. Calcúlate Average Product (ΔP) and Marginal Product (MP):

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Example 2. Calculate AP and MP from the following particulars:
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Land 1 1 1 1 1 1 1 1 1 1

Labour 0 1 2 3 4 5 6 7 8 9

TP (units) 0 20 50 90 120 140 150 150 140 120

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Example 3. Calculate TP and AP:

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Example 5. Find out the missing values from the following table:
Variable 0 1 2 3 4 5 6 7
Factor

TP (in units) – – – – 25 – – –

AP (in units) – 5 – – – – – –

MP (in units) – – 8 4 – 5 0 -4

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Example 6. Identify the different output levels, which mark the three phases of the
operation of the Law of Variable Proportions, from the following table:
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Units of variable 0 1 2 3 4 5
factor
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TP (in units) 0 8 20 28 28 20

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IMPORTANT QUESTIONS AD
1. Explain the law of variable proportions with the help of a table and diagram.
OR
Explain the law of returns to a factor with the help of a table and diagram
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2. Explain the relationship between TP and MP and MP-AP

3. Explain the reasons behind the various phases of LVP?

4. Differentiate between:
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a. Variable Factors and Fixed factors of production

b. Short run and Long run
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B

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