Production function final
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The document discusses the production function, which describes the relationship between inputs (factors of production) and outputs in the production of goods or services. The key inputs are land, labor, and capital. Land provides natural resources, labor provides human effort, and capital provides buildings, machinery, and equipment. The production function can be represented mathematically as output (Q) depending on capital (K), land (L), and labor (La). There are short-run and long-run production functions, where in the short-run some inputs can vary and in the long-run all inputs can vary as the firm changes scale. Laws of returns include variable proportions as one input varies, and returns to scale as all inputs vary proportionally
Production function final
- 1. Production Function States the relationship between inputs and outputs Inputs – the factors of production classified as: Land – all natural resources of the earth – not just ‘terra firma’! Price paid to acquire land = Rent Labour – all physical and mental human effort involved in production Price paid to labour = Wages Capital – buildings, machinery and equipment not used for its own sake but for the contribution it makes to production Price paid for capital = Interest
- 2. Production Function Inputs Process Output Land Labour Capital Product or service generated – value added
- 3. Production Function Mathematical representation of the relationship: Q = f (K, L, La) Output (Q) is dependent upon the amount of capital (K), Land (L) and Labour (La) used
- 4. Types of Production Function 1. Short Run Production Function 2. Long Run Production Function
- 5. Short Run Production Function: In the short run all other factors are fixed in supply but at least one factor is capable of being changed to have more output. This aspect of production function is known as Law of variable proportions. Proportional relationship between Production and factors of production is referred to as Law of Returns to a Factor
- 6. Long Run Production Function: In the long run it is possible for a firm to change all inputs up and down in accordance with its scale. This is known as Return to scale. When a producer changes all the factors of production in the same proportion, the Proportional relationship between Production and factors of production is referred to as Law of Returns to Scale By doing this, the firm is able to increase its total capacity – not just short term capacity Associated with a change in the scale of production
- 8. Laws of Returns 1. Law of variable proportions. 2. Law of Returns to Scale
- 9. Law of variable proportions Law of variable proportions stats that as we increase quantity of only one input keeping other inputs fixed, Total product initially increases at an increasing rate, then at a decreasing rate and finally at a negative rate.
- 10. Law of Returns to Scale Law of returns to scale refers to increase in output as a result of increase in all factors in the same proportion.
- 11. Stages of Returns to Scale 1. Increasing Return to Scale ( Due to many type of internal economies) 1. Constant Return to Scale (After reaching certain level of production internal and external economies are balanced) 1. Diminishing Return to Scale ( Due to emerging diseconomies, Large company creates difficulties of control)