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Production Function

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6 views

Production Function

Uploaded by

ew024330
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Production

- It is the process of transformation of inputs into outputs.

Production function - technical relationship between inputs and


outputs.
Q = f(i1, i2, i3, ..., in)

Inputs (factors of production)

1. Fixed inputs are those, the application of which doesn’t change


with change in output. Eg. land
2. Variable inputs are those, the application of which changes with
change in output. Eg. Labour

Types of production function


1. Very short run : all inputs are fixed.
2. Short run : Only one input is variable and others are fixed.
3. Long run : every input is variable.

Production concepts -
(a) Total product (TP) / Total physical product (TPP) is the total output
produced by all units of input used in production.

(b) Average product (AP) / Average physical product (APP) is the


amount of output produced per unit of variable input.

Formula:
AP = TotalProduct(TP)​/ N

Where:

● TP = Total Product
● N = Number of units of input used
(c) Marginal product (MP) / Marginal physical product (MPP) is the
additional output produced when one more unit of input is added,
keeping other inputs constant.

Formula:
MP = ΔTP​/ ΔN

Where:

● ΔTP = Change in Total Product


● ΔN = Change in the number of units of input used

Or

MP = TPn​−TPn−1​

Where:

● TPn = Total Product at the current level of input (n units)


● TPn-1 = Total Product at the previous level of input (n-1 units)

MP is the slope of TP

Law of variable proportions states that as we increase the quantity of


only one input while keeping other inputs fixed, total product initially
increases at an increasing rate then at a decreasing rate and finally at
a negative rate.

Three passes of Law of variable proportions :

(a) Increasing returns to a factor : TP increases at an increasing rate


and MP increases.

(b) Diminishing returns to a factor : TP increases at a diminishing rate


and MP falls, but remains positive.

(c) Negative returns to a factor : TP falls and MP becomes negative.


Relationship between TP and MP

(a) When TP increases at an increasing rate, MP increases.


(b) When TP increases at a diminishing rate, MP starts decreasing.
(c) When TP is maximum, MP is zero.
(d) When TP decreases, MP is negative.

Relationship between AP and MP

(a) When MP > AP, AP increases.


(b) When MP = AP, AP is constant and at its maximum point.
(c) When MP < AP, AP falls.
(d) MP becomes negative whereas AP remains positive

Law of diminishing returns states that when more and more units of a
variable factor are employed with a fixed factor, then the marginal
product of the factor must fall.

Here, land is a fixed input and labour is a variable input.


Phase 1: Increasing Returns to Factor
1. Better utilization of fixed factors: Variable inputs maximize the efficiency of
fixed resources.
2. Specialization: Workers can specialize, boosting productivity.

Phase 2: Diminishing Returns to Factor


1. Overutilization of fixed factors: Fixed resources become a constraint.
2. Decreasing marginal productivity: Additional variable inputs add less to
total output.

Phase 3: Negative Returns to Factor


1. Overcrowding: Excessive use of variable inputs hinders efficiency.
2. Resource conflicts: Workers or inputs interfere with each other, reducing
output.

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