Economics

Econo Notes
mics Video Notes

Production
Functions

Class 11ᵗʰ
Introduction
Production refers to transformation of inputs into outputs.

Production Function
Production function is an expression of the technological relation between
physical inputs and outputs of a good.

O x = f(I 1 , ii 2, iii 3, ....................in )

Short Run & Long Run

Short Run Long Run

Short run refers to a period in Long run refers to a period in
which output can be changed by which output can be changed by
changing only variables factors. changing all factors of production.

Difference between Short Run & Long Run

Basis Short Run Long Run

Short run refers to a period in Long run refers to a period of

which output can be changed which output can be changed
Meaning
by changing only variables by changing all factors of
factors. production.

Factors are classified as

All factors are variable in the
Classification variables and fixed Factor in
long run.
the short run.

In the short run, demand is

more active in price In the long run, both demand
Price determination as supply and supply play equal role in
determination cannot be increased price determination as both
immediately with increase in can be increased.
demand
Variable Factors & Fixed Factors
Variable Factors :
Variables Factors refers to those factors, which can be changed in the short
run.

Fixed Factors :
Fixed Factors refers to those factors, which cannot be changed in the short run.

Difference between Variable Factors & Fixed

Factors

Basis Variable Factors Fixed Factors

Variables Factors refers to Fixed Factors refers to those

Meaning those factors, which can be factors, which cannot be
changed in the short run. changed in the short run.

Relation with The very directly with They do not vary directly with
output output. output.

Raw materials, casual Building plant and machinery,

Example
labour, power, fuel, etc permanent staff, etc.

Types of Production Factors

Short Run Production Function Long Run Production Function

(Variable Proportion Type) (Constant Proportion Type)
Short run production function Long run production function
refers to a situation when output refers to a situation when output
is increased by changing only one is increased by increasing all the
input while keeping other inputs inputs simultaneously and in the
unchanged. same proportion.

Concept of Product
Product or output refers to the volume of goods produced by a firm or an
industry during a specified period of time.
 Total Product (TP)
Marginal Product (MP)
Average Product (AP)

Total Product (TP)

Total product refers to total quantity of goods produced by a firm during
a given period of time with given number of inputs.

Average Product (AP)

Average product refers to output per unit of variable input.

Total Product (TP)

Average Product (AP) =
Units of variables factors (n)

TP = AP × Units of Variable Factor

Marginal Product (MP)

Marginal Product refers to addition to total product, when one more unit of
variable factor is employed.
MP = TP - Tp
n n n-1
Where,
MPn = Marginal Product of n unit of variable factor;
TPn = Total Product of n units of variable factor;
TPn-1 = Total Product of (n-1) units of variable factor;
n = number of units of variable factor.
How's the Josh?
Question:
Calculate Average Product (AP) and Marginal Product (MP):

Solution:
Variable
TP MP AP
factor
(Units) (Units) (Units)
(in units)

1 8 8 8

2 16 8 8

3 24 8 8

4 29 5 7.25

5 29 0 5.8

6 25 4 4.16
Question:
Calculate the value of TP and AP:
Solution:
Variable
MP TP AP
factor
(Units) (Units) (Units)
(in units)

1 10 10 10

2 12 22 11

3 14 36 12

4 12 48 12

5 7 55 11

6 5 60 10

Question:
Find out the missing values from the following table:
Solution:
Variable
TP AP MP
factor
(Units) (Units) (Units)
(in units)

0 - - -

1 4 4 4

2 10 5 6

3 18 6 8

4 24 6 6

5 25 5 1

Returns To A Factor : Law of Variable Proportions

Law of Variable Proportion (LVP) states that as we increase quantity of only
one input keeping other inputs fixed, total product (TP) initially increases at an
increasing rate then at a decreasing rate and finally at a negative rate.

The assumption of Law of Variable Proportions in brief are:

Fixed Technology : Technology remains constant during production.
Variable Input : Only one input is variable, while others remain fixed.
Short Run : The law operates in the short run where at least one factor is
fixed.
 Homogeneous Input : All units of the variable factor are identical.
Divisible Inputs : Inputs can be divided into smaller units for adjustment.

Law of Variable Proportions

Fixed Factor Variable factor TP MP

Phase
(Land in areas) (in units) (Units) (Units)

1 1 10 10 Phase 1 : Increasing
1 2 30 20 Returns to a Factor.

1 3 45 15
Phase 2 : Diminishing
1 4 52 7
Returns to a Factor.
1 5 52 0

Phase 3 : Negative
1 6 48 -4
Returns to a Factor.

Phase I (Between O to Q) To
increase at an increasing rate and
MP also increases.
Phase II (Between Q to M) TP
increase at decreasing rate and MP
falls. This phase ends when MP
becomes zero and TP reaches its
maximum point.
Phase III (Between point M) TP
starts decreasing and MP not only
falls, but also becomes negative.
Point of Inflexion (Point Q) Point 'Q'
is known as point of Inflexion as
curvature of TP curve changes at
this point.

Reasons for Law of Variable Proportion

Reason for increasing Return to a Factor (Phase I)
Better Utilisation of the Fixed Factor.
Increased Efficiency of variable factor.
Indivisibility of Fixed Factor.
Reason for Diminishing Returns to a Factor (Phase II)
Optimum combination of factors.
Over-utilisation of fixed factor
Imperfect Substitutes.

Reason for Negative Returns to a Factor (Phase III)

Limitation of Fixed Factors.
Poor coordination between Variable and Fixed Factor.
Decrease in efficiency of variable factor.

Law of Diminishing Returns Great Job

Law of diminishing returns states that when more and more units of a variable
factor are employed with a fixed factor, then marginal product of the variable
factor must fall.
This law is also known as " Law of Diminishing Marginal Product".

Fixed Factor Variable factor TP MP

(Land in areas) (in units) (Units) (Units)

1 1 12 12

1 2 22 10

1 3 30 8

1 4 36 6

1 5 40 4

This law considers only the falling

phases of MP and ignores the phase
of increasing MP.
In the short run, a firm can change
the output by changing the quantity
of variable factors only.
However, in the long run, all the factors
become variable.
Relationship between TP & MP

Fixed Factor Variable factor TP MP

(Land in areas) (in units) (Units) (Units)

1 0 0 -

1 1 10 10

1 2 30 20

1 3 45 15

1 4 52 7

1 5 52 0

1 6 48 -4

As long as TP increase at increasing

rate, MP also increases.
When TP increases at diminishing
rate, MP decreases.
When TP reaches its maximum point,
MP becomes zero.
When TP starts decreasing, MP
becomes negative.

Relationship between AP & MP

Fixed Factor Variable factor AP MP

(Land in areas) (in units) (Units) (Units)

1 0 0 -

1 1 15 10

1 2 15 20

1 3 15 15

1 4 13 7

1 5 10.40 0

1 6 8 -4
As long as MP is more than AP, AP rises.
When MP is equal to AP, AP is at its
maximum.
When MP is less than AP, AP falls.
Thereafter, both AP and MP fall, but MP
becomes negative, whereas, AP remains
positive.
MP falls at a faster rate in comparison to
fall in AP.

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