Theory of Production

Production Function
Through Iso-quant
Analysis
 Isoquants

Isoquant curve is similar to ‘indifference

curve’ – It shows the different
combinations of two factors yielding the
same level of output’
 Constructing an isoquant curve
30 a
28 Labour Capital
26 30 6
24 24 7
22 20 8
14 10
20
10 13
18 8 15
Capital

16 6 20
14
12
10
8 b
6 P = 100
4 Units
2
0
0 2 4 6 8 10 12 14 16 18 20 22
Labour
 Isoquant map
30

Also called,
Iso-Product curve,
Equal Product Curve
20 Or Production
Indifference Curve
Capital

10

P4=400 units
P3=300 units
P2=200 units
0 P1=100 units
0 10 20
Labour
 Properties of Iso-quants

 Convex to the origin

 Slope towards from left to right
 Never intersect with each other
Marginal Rate of Technical Substitution
(MRTS)

The amount of one input which can be

substituted for another input in the
production process, without changing the
level of output.
Illustration…

MRTS of labour for capital can be defined

as – the amount of capital which can be
substituted or replaced for a unit factor
of labour, without changing the level of
output.

L
MRTS =
K
 30 a
 = 4 MRTS = 4
26 b

L = 1 MRTS =tanθ = K/L

20
Capital

MRTS = 1

c K = 1
10
d
 L= 1

0
0 67 10 13 14 20
Labour
Iso-Cost Curves
 Iso-Cost Curves
A4
Shows all
A3 combinations of
A2
inputs having equal
total cost (that can
A1 be purchased for a
Input 2

given expenditure)

B1 B2 B3 B4
O
Input 1
 Iso-Cost Curves
A4
If
A3 Price of Input A = Rs. 4 &
Price of Input B = Rs. 5 &
A2
Total Outlay is Rs. 200, Then
A1
…
Input 2

B1 B2 B3 B4
O
Input 1
Producer’s Equilibrium
Capital Optimum level of output @ given cost

O
Labour
Capital Optimum level of output @ given cost

IQ3(3000)
IQ2 (2000)
O IQ1 (1000)
Labour
 Optimum level of output @ given cost
Capital

Iso-cost Curve

IQ3(3000)
IQ2(2000)
O IQ1(1000)
Labour
 Optimum level of output @ given cost

r Optimum Point
Minimum Cost and
s
Maximum Output
Capital

K1 t

x
IQ3 (3000)
v
IQ2 (2000)
O L1 IQ1 (1000)
Labour
 Expansion Path

Output produced by a firm increases with

the increase in its financial resources.
 Expansion Path
Capital

B1 IQ1
O
Labour
 Expansion Path
Capital

IQ2
B1 B2 IQ1
O
Labour
 Expansion Path
Capital

IQ4
IQ3
IQ2
B1 B2 B3 B4 IQ1
O
Labour
 Expansion Path

Expansion Path
(Least cost method
of producing different
Capital

levels of output)

IQ4
IQ3
IQ2
B1 B2 B3 B4 IQ1
O
Labour
Production in the Short run
 Long-run and short-run production
 fixed and variable factors
 distinction between short run and long run
 The law of diminishing returns
 The short-run production function:
 total physical product (TPP)
 average physical product (APP)
 marginal physical product (MPP)
 the graphical relationship between TPP, APP
and MPP
 Production with
One Variable Input
 Law of Variable Proportions
(Law of diminishing returns)

‘As the quantity of one input is increased,

keeping the quantity of other inputs fixed
– the output increase in the beginning
and afterwards decreases’
 Illustration …

No. of Amount of Total Output

Machines Labour (Q)
5 0 0
5 1 20
5 2 60
5 3 120
5 4 160
5 5 190
5 6 216
5 7 224
5 8 224
5 9 216
5 10 200
 Illustration …

Average Marginal
No. of Amount of Total Product Product
Machines Labour (L) Output (Q) (Q/L) (dQ/dL)
5 0 0 0 0
5 1 20 20 20
5 2 60 30 40
5 3 120 40 60
5 4 160 40 40
5 5 190 38 30
5 6 216 36 26
5 7 224 32 8
5 8 224 28 0
5 9 216 24 -8
5 10 200 20 -16
 Wheat production per year from a particular farm
Number of
40 workers TPP
0 0
Tonnes of wheat produced per year

1 3
2 10
30 3 24
4 36
5 40
6 42
7 42
20 8 40

10

0
0 1 2 3 4 5 6 7 8
Number of farm workers
 Wheat production per year from a particular farm
Number of
40 workers TPP
0 0
Tonnes of wheat produced per year

1 3
2 10
30 3 24
4 36
5 40
6 42
7 42
20 8 40

10

0
0 1 2 3 4 5 6 7 8
Number of farm workers
 Wheat production per year from a particular farm
d
40
TPP
Tonnes of wheat produced per year

30 Maximum output

20

10

0
0 1 2 3 4 5 6 7 8
Number of farm workers
Wheat production per year from a particular farm
40

Tonnes of wheat per year

TPP
30

20

10
TPP = 7
0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
14 L = 1
Tonnes of wheat per year

12

10

8
MPP = TPP / L = 7
6

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
-2
Wheat production per year from a particular farm
40

Tonnes of wheat per year

TPP
30

20

10

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
14
Tonnes of wheat per year

12

10

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
-2
MPP
Wheat production per year from a particular farm
40

Tonnes of wheat per year

TPP
30

20

10

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
14
Tonnes of wheat per year

12 APP = TPP / L
10

4 APP
2

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
-2
MPP
Wheat production per year from a particular farm
40

Tonnes of wheat per year

TPP
30

20 b
Diminishing returns
10 set in here

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
14
b
Tonnes of wheat per year

12

10

4 APP
2

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
-2
MPP
Wheat production per year from a particular farm
d
40

Tonnes of wheat per year

TPP
30

20 Maximum
b
output
10

0 Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
14
b
Tonnes of wheat per year

12

10

4 APP
2

0 d Number of
0 1 2 3 4 5 6 7 8 farm workers (L)
-2
MPP