Production function
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This document discusses production theory and different types of production functions. It explains the law of variable proportions, which describes how total product increases at an increasing rate with one variable input initially, then at a decreasing rate. There are three stages: increasing, constant, and decreasing returns. The law of returns to scale explains how total output responds to proportional changes in all inputs. There can be increasing, constant, or diminishing returns to scale depending on whether output increases proportionately more, the same, or less than the increase in inputs.
Production function
- 2. contents Introduction Production Function Types of Production Function Law of Variable Proportion or Return to a Factor Stages in Law of Variable Proportion Law of Return to Scale Conclusion
- 3. introduction Production is the process whereby inputs are transformed Into outputs. The economic unit that performs the production activity is known as the producer or the firm. Production Theory , concerns with the problem of combining various factor inputs, given the state of technology in order to produce a stipulated output at the minimum cost.
- 4. PRODUCTION FUNCTION Production Function refers to the technical relationship between the quantity of good produced (output)and the factors of production (input) necessary to produce it. Mathematical representation or the relationship Production (Y) is a function (f) of labour (L), Capital (K) and land (S). Y=f (L,K,S)
- 5. TYPES OF PRODUCTION FUNCTION TYPES Short-Run (One variable factor other are fixed) Law of Variable Proportion Long-Run (All factors are variable) Law of Returns to Scale
- 6. Law of variable proportion When one input is variable and all other inputs are fixed, the firm’s production function exhibits the LAW OF VARIABLE PROPORTION. ASSUMPTIONS: 1) One factor is variable and the other are constant. 2) Labour is homogeneous. 3) Technology remains constant. 4) Factor of production can be used in different proportions, For Example, 2 hectares of land with 1 labourer; or 2 hectares of land with 4 labourers etc.
- 7. Explanation of law Units of Land Units of Labour Total Product Marginal Product = ΔTP/ΔL Average Product =TP/L (1) (2) (3) (4) (5) 1 1 2 --- 2 1 2 5 3 2.5 1 3 9 4 3 End of First Stage Beginning of the Second Stage 1 4 12 3 3 1 5 14 2 2.8 1 6 15 1 2.5 1 7 15 0 2.1 End of the Second Stage Beginning of the Third Stage 1 8 14 -1 1.7
- 9. STAGES OF LAW OF VARIABLE PROPORTION Stages Total Product (TP) Marginal Product (MP) Average Product (MP) STAGE I ( O to M) It increases at an increasing rate upto point F. Initially increases and reaches the maximum point at A. It increases in the this stage but lies below MP. STAGE II (M to N) Increasing at diminishing rate & reaches its maximum point H. After A, it begins to diminishing and become zero at M. Increases & reaches its maximum point S. At point S, average and marginal product are equal and than begin to diminish but lies above MP. STAGE III ( Beyond N) Start declining. Becomes Negative. Continues to diminish but always
- 10. STAGE OF RATIONAL DECISION STAGE III NO STAGE I NO MP of fixed factor is negative. Full utilization is not there STAGE II YES MP and AP are positive but diminishing.
- 11. LAW OF RETURN TO SCALE Rerun to Scale describe the behavior of Total output as all inputs varied by the same proportion. Return to scale is a factor that is studied in the long run. In the long run all factors of production are variable. The response of out put to change in the scale or size of all the factors in the same proportion is termed as Return to scale. There are three aspects of Return to Scale. Increasing Return to Scale Constant Return to Scale Diminishing Return to Scale
- 12. _ Explanation of law Units of Labour Units of Capital % Increase in Labour & Capital Total Product % Increase in Total Product Return to Scale 1 2 --- 10 --- 2 4 100 30 200 INCREASING 3 6 50 60 100 4 8 33 80 33 5 10 25 100 25 CONSTANT 6 12 20 110 10 7 14 16 120 9 DECRESING 8 16 14 125 4 TABLE
- 13. Increasing return to scale Increasing Return to Scale occurs when the percentage increase in all factor Inputs causes proportionately greater increase in Output. For Example: Fig shows that 10% increase in input causes 15% increase in output. The main cause of operation is that when scale of production is increased then due to division of labour and specialization many types of internal economies are available. % Increase in Inputs %IncreaseinOutput
- 14. Constant return to scale Constant Return to Scale occurs when a given percentage increase in all factor inputs causes equal percentage increase in output. For Example: Fig shows that 20% increase in inputs causes 20% increase in output. This situation arise , when after reaching a certain level of production , economies of scale are counter-balanced by diseconomies of scale. %IncreaseinOutput % Increase in Input
- 15. Diminishing return to scale Diminishing Return to Scale occurs when a given percentage increase in all factor inputs causes proportionately lesser increase in output. For Example: Fig shows that 15% increase in all factors inputs causes only 10% increase in output. The main cause of its operation is that diseconomies outweigh economies of scale, e.g. indivisible factors becoming inefficient and less productive, high cost of skilled labour, high transportation charges etc, %Increase in Input%IncreaseinOutput
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