Production
Function:
Meaning:
In Economics, the technical law, relating inputs to outputs, has been given the
name of production-function.
In simple words, production-function expresses the relationship between the
physical inputs and physical output of a firm. It is thus, a purely technical relation
that connects factor inputs and outputs.
The production function can be mathematically written as:
qx =f (F1, F2, F3, ……., Fn)
where,
qx = the quantity of x commodity
F1, F2, F3, ……., Fn = Different factor-inputs
This equation tells that the output of x depends on the factors F1, F2, F3, ……., Fn . It also
suggests that there is a functional relationship between factor-inputs and the amount of
goods x.
For example, the output of cloth depends on cotton, thread, machine, labour, chemicals,
etc. Hence, the relationship between factor inputs (e.g. thread, machine, labour,
chemicals, etc) and the output of cloth can be shown with the help of production-function.
Fixed Factors and Variable Factors:
Factors of production are broadly classified into two categories, i.e. fixed and
variable factors:
1) Fixed Factors- The factor inputs which cannot be varied in the short-period, as
and when required are called fixed factors. E.g.: Machinery, heavy equipment,
factory building, land, etc.
2) Variable factors- The factor inputs which can easily be varied, in the short-
period as and when required, are called variable factors. E.g.: Labour, raw
material, power, fuel, etc.
The distinction between fixed factors and variable factors appears only in the
short-period. In the long-run, all the factors of production become variable
factors.
Short Period and Long Period:
The time-period during which a firm in order to make changes in its production can
change its variable factors but not fixed factors is termed as short-period.
The time period in which a firm can change all the factors of production is termed
as long period.
In economics, we study two types of production-functions. These are:
Short-run Production-Functions or the Law of Variable Proportions: In the short
period some factors are fixed and some are variable. The short run production
function discusses what happens when additional units of one variable factor of
production is combined with a fixed stock of some factors of production. The law
which tells about this relation is called the law of variable proportions or returns to
a factor. Since it is related to a short period, it is called short-run production-
function.
Long-run Production-Function or Returns to scale: In the long-run, all factor-inputs
can be varied. In the long-run we can expand or reduce the scale of production as
well. The way in which the output varies with the changes in the scale of
production is discussed in the long-run production functions. Since it is related to
the long-run it is termed as long-run production function.
The Law of Variable Proportions or Returns to a
Factor:
Assumptions:
1) Technique of production does not change. The law does not
apply if there is improvement in technology.
2) All units of variable factor are equally efficient.
3) Factors of production cannot be substituted.
The law of variable proportion states that with the increase in a
variable factor, keeping other factors constant, total product
increases at an increasing rate, then increases at diminishing rate
and finally starts declining.
Explanation of the law:
Stage I: Stage of Increasing Returns, Stage II: Stage of Diminishing Returns, Stage III:
Stage of Negative Returns.
Fixed Variable Total Marginal
Factor Factor: Physic Physical
Land Labour al Product (MPP)
(Acres) (Units) Produc
t (TPP)
1 0 0 -
1 1 2 2 Stage I
1 2 6 4
1 3 12 6
1 4 16 4
Stage II
1 5 18 2
1 6 18 0
1 7 14 -4 Stage
III
1 8 8 -6
Three Stages of the Law:
The relation between variable factor and physical output has three stages which are
shown in the example and the diagram:
Stage I- In this stage total physical product (TPP) increases at an increasing rate and
marginal physical product (MPP) also increases. Since in this stage MPP increases with
the increase in the units of a variable factor, it is called the stage of increasing returns. In
the example, the stage I of the law runs upto 3 units of labour and in the diagram it is
between 0 to L.
Stage II- In this stage total physical product (TPP) continues to increase but at a
diminishing rate and marginal physical product (MPP) diminishes but remains positive. In
this stage MPP decreases with the increase in the units of a variable factor, it is termed
as the stage of diminishing returns. In the example, stage II runs between 4 to 6 units of
labour and in the diagram it is between L to M. This stage goes to the point when TPP
reaches the maximum (18 in the example and point R in the diagram) and MPP becomes
zero.
Stage III- In this stage total physical product (TPP) starts declining and marginal physical
product (MPP) decreases and becomes negative. Since in this stage MPP becomes
negative, it is called the stage of negative returns. In the example, stage III runs between
7 to 8 units of labour and in the diagram it starts from the point 'M' onwards.