 Meaning of Production Function – Short-Run

and Long-Run
 Total Product, Average Product and Marginal
Product.
 Returns to a Factor
 Cost: Short run costs - total cost, total fixed
cost, total variable cost; Average cost; Average
fixed cost, average variable cost and marginal
cost-meaning and their relationships.
 Revenue - total, average and marginal revenue
- meaning and their relationship.
 Supply, market supply, determinants of supply,
supply schedule, supply curve and its slope,
movements along and shifts in supply curve,
price elasticity of supply; measurement of price
elasticity of supply - percentage-change
method.
3.1
Production Function:
Returns to a Factor
Production Function: Returns to a
Factor
Production function refers to a mathematical
relationship between physical inputs used and
physical output produced by a firm.
Suppose there are only two factor inputs — labour (L)
and capital (K). We may write the production function
as:
Q = f (L, K)

For various quantities of inputs used, the production

function gives the maximum quantity of output that
can be produced.
Since by definition we are taking the maximum output
for any level of inputs, a production function deals only
with the efficient use of inputs. Efficiency implies that
it is not possible to get any more output from the same
level of inputs.
A production function is defined for a given technology.
It is the technological knowledge that determines the
maximum levels of output that can be produced using
different combinations of inputs. If the technology
improves, the maximum levels of output obtainable for
different input combinations increase. We then have a
new production function.
Short Run and Long Run Production
Functions
Short run production function
Short run production function shows the behaviour
of output when only one factor input is varied and
the other factor inputs are held constant.
Assuming that there are only two factors of production
– Labour (L) and Capital (K), in order to increase the
output level the firm can increase only quantity of the
variable factor (say, labour) while keeping the quantity
of the fixed factor (capital) unchanged.
Long run production function
Long run production function shows the behaviour
of output when all the factor inputs are varied.
The firm can increase output by increasing both the
factor inputs (labour and capital) simultaneously and
in the same proportion.
Total Product, Average Product and
Marginal Product
Table 3.1: Total Product (TP), Average Product (AP),
Marginal Product (MP)
Units of Variable Factor (Labour) TP AP MP
1 2 2 2
2 5 2.50 3
3 9 3 4
4 12 3 3
5 14 2.80 2
Total Product (TP)
Suppose we vary a single factor input (labour) and keep
the other factor input (capital) constant. Then for
different levels of the variable input, we get different
levels of output. This relationship between the variable
input and output, keeping all other inputs constant, is
often referred to as Total Product (TP) of the variable
input. This is also sometimes called total return or
Total Physical Product (TPP) of the variable input.
Refer to Table 3.1. Suppose capital (K) is fixed at 2 units.
As we move down along the column we get the output
value for different values of labour. This is the total
product of labour schedule with K = 2. This is shown in
the second column of Table 3.1
Average product (AP)
AP is defined as the output per unit of the variable
input.
It is also called average returns.
TP
AP =
units of variable input

(Therefore, TP = AP × units of variable input)

The third column of Table 3.1 gives us a numerical
example of average product of labour (with capital
fixed at 2). Values in this column are obtained by
dividing TP (column 2) by units of labour (Column 1).
At 1 unit of labour AP is 2, at 2 units of labour AP is
2.50 and so on.
Marginal product (MP)
MP is defined as the change in output per unit of
change in the variable input (labour) when all
other inputs are held constant.
change in output ( ∆TP)
MP =
change in input ( ∆L)

MP can also be defined as the increase in TP when one

more unit of the variable input is employed, keeping all
other inputs constant.
MPL= (TP at L units) – (TP at ‘L – 1’ unit)
MP is also called marginal physical product (MPP)
or marginal returns.
The last column of Table 3.1 gives us a numerical
example of Marginal Product of labour (with capital
fixed at 2). Values in this column are obtained by
dividing change in TP by change in L. For example,
when L changes from 1 to 2, TP changes from 2 to 5.
Here, Change in TP = 5 – 2 = 3. Change in L = 1.
Therefore, Marginal product of the 2nd unit of labour
= 3/1 = 3. Alternately, MP2 = TP2 – TP1 = 5 – 2 = 3

 Top Tips
• Since inputs cannot take negative values, marginal product is undefined
at zero level of input employment.
• For any level of the variable input (labour), the sum of all marginal products
up to that level gives the total product.
• Average product of the variable input (labour) at any level of employment
is the average of all marginal products up to that level.
Law of Variable Proportions (Law of
returns to a factor or Law of diminishing
marginal product)
Returns to a factor refers to change in output when
only one factor input is changed, keeping all other
factor inputs unchanged.
In Table 3.2, notice that TP increases as labour input
increases. But the rate at which it increases is not
constant. An increase in labour from 1 to 2 increases TP
by 3 units. An increase in labour from 2 to 3 increases
TP by 4 units. The rate at which TP increases is shown
by the MP. Notice that the MP first increases (up to 3
units of labour) and then begins to fall. This tendency
of the MP to first increase and then fall is called the
law of variable proportions or the law of diminishing
marginal product.
Law of variable proportions says that the marginal
product of a factor input initially rises with its
employment level. But after reaching a certain
level of employment, it starts falling.
 Table 3.2: Law of Variable Proportions
Units of Variable TP MP Phase of Type of
Factor (Labour) Production Returns
0 0 -
1 2 2 Increasing
Phase I returns to a
2 5 3 factor
3 9 4
4 12 3
5 14 2
Phase II Diminishing
6 15 1
returns to a
7 15 0 factor
8 14 -1 Phase III
There are three phases of production:
Increasing returns to a factor (Phase I)
Phase I: With the employment of more and more units
of the variable factor along with the given fixed factor,
MP increases and hence TP increases at an increasing
rate. This is called Increasing returns to a factor.
(In Table 3.2, up to 3 units of labour)
Reasons for the Increasing returns to a variable factor:
1. Fuller utilisation of the fixed factor: Certain factors
of production are indivisible. They can put to their
best use only when they are fully employed.
2. Division of labour and specialisation: When a
large number of labour units are employed, it is
possible to divide a job in different stages. It results
in specialisation implies higher efficiency and more
production.
Diminishing returns to a factor (Phase II
and III)
Phase II: Diminishing returns to a variable input referred
to a stage in production when with the employment of
more and more units of variable factor with the given
fixed factor, marginal product (MP) decreases and
total product (TP) increases at diminishing rate.
(In Table 3.2, at labour units 4 to 7, where MP becomes
zero at 7th unit of labour)
Reasons for the decreasing returns to a variable factor:
1. Over-utilisation of the fixed factor: As we keep on
increasing the variable factor along with the fixed
factor eventually a position comes when the fixed
factor has its limits and starts yielding diminishing
 returns.
2. Improper coordination between Fixed and Variable
factors: After a certain level of employment, the
production process becomes too crowded with the
variable input and factor proportion tends to
become less and less suitable for the production.
Phase III: Negative returns to a factor states that if
more and more units of variable factor are employed
with fixed factor, beyond a certain level of output
marginal product of the variable factor become
negative and total product will fall.
Reasons for the Negative returns to a variable factor:
1. Limitation of fixed factor: Any increase in variable
factor along with fixed factor, beyond a certain level
of output may lead to negative marginal product and
hence total product will fall.
2. Poor coordination between variable and fixed
factor: Exceeding the optimum capacity of fixed
and variable factors, the work relationship between
the factors may get disturbed, therefore, marginal
product may become negative and hence total
product will fall.
(In Table 3.2, when 8th unit of labour is employed)
Shapes of TP, AP and MP curves
Shape of TP curve
• In phase I of production, TP increases at increasing
rate. Therefore, TP curve is convex in this phase.
• In phase II, TP increases at decreasing rate.
Therefore, TP curve is concave in this phase.
• In phase III, TP falls. Therefore, TP curve is
downward sloping in this phase.
Thus, the TP curve looks like a S-shaped curve.
Shape of MP curve
• According to the law of variable proportions, initially
MP of a variable factor rises. Therefore, MP curve is
upward sloping. (phase I)
• Then, after a certain level of employment of the
variable factor, MP falls but remains positive.
Therefore, MP curve is downward sloping but
above the X-axis. (phase II).
• Finally, MP becomes negative. Therefore, MP curve
is downward sloping and below the X-axis. (phase
III)
Thus, the MP curve looks like an inverse U-shaped
curve in the input-output plane.
Shape of AP curve
For the first unit of the variable factor, MP = AP.
(Observe Table 3.2) Therefore, AP and MP curves
starts from the same point. Now as we increase the
units of the variable factor, initially, MP rises due to
increasing returns to a factor. So, AP (being the
average of all MPs) also rises but rises less than MP.
Then, after a point, MP starts falling due to diminishing
returns to a factor. However, as long as MP > AP, AP
continues to rise. Figure 3.2 shows that after l1 units of
the variable factor, MP starts falling but AP still rises
because MP > AP. But once MP has fallen sufficiently,
its value becomes less than AP. When MP < AP, AP
also starts falling. After l2 units of the variable factor,
both MP and AP fall since MP < AP. Thus, AP curve is
inverse U-shaped like the MP curve.

For the first unit of the variable factor, MP = AP.

• As we increase the units of the variable factor, initially MP
rises. So, AP also rises but rises less than MP.
• Then, after a point MP starts falling. However, as long as
MP > AP, AP continues to rise.
• But when MP < AP, AP also starts falling.
Thus, AP curve is also inverse ‘U’-shaped.
Relationship between AP and MP
1. When MP > AP, AP rises.
2. When MP = AP, AP is constant and maximum.
3. When MP < AP, AP falls.

At what point does the MP curve cut AP

curve?
The MP curve cuts AP curve from above at its maximum
point. This is because as long as the AP increases,
MP > AP. Otherwise, AP cannot rise. Similarly, when
AP falls, MP < AP. It, therefore, follows that MP curve
cuts AP curve from above at its maximum point where
MP = AP and AP is constant and maximum.
In Figure 3.2, AP is maximum at point P corresponding
to l2 units of variable factor. To the left of l2, AP is
rising and MP is greater than AP. To the right of l2, AP
is falling and MP is less than AP. Only at the maximum
point of AP curve (point P), MP = AP. Therefore, the
MP curve cuts AP curve from above at its maximum
point.

When AP rises, MP > AP. Otherwise, AP cannot rise.

Similarly, when AP falls, MP < AP. It follows that MP curve
cuts AP curve from above at its maximum point where MP =
AP.
Relationship between TP and MP
Marginal products (MP) are additions to total product
(TP), therefore, at any level of employment of an
input, TP is the sum of MPs of all units of that input,
i.e., TP = SMP.
• TP increases at an increasing rate when MP increases.
• TP increases at a decreasing rate when MP decreases
but remains positive.
• TP is maximum when MP becomes zero.
• TP declines when MP becomes negative.
Relationship between TP and AP
• When TP increases at an increasing rate, AP increases
since MP increases.
• When TP increases at a decreasing rate, AP increases
when MP > AP but decreases when MP < AP.
• When TP falls, AP decreases but is positive since
TP is positive.

Key Terms
Production function —A mathematical relationship between
physical inputs used and physical output produced by a firm.
Short run production function—It shows the behaviour of output
when only one factor input is varied and the other factor inputs
are held constant.
Long run production function—It shows the behaviour of output
when all the factor inputs are varied simultaneously in the same
proportion.
Average product (AP)—The output per unit of the variable input.
Marginal product (MP)—The change in output per unit of change
in the variable input (labour) when all other inputs are held
constant.
Returns to a factor—The change in output when only one factor
input is changed, keeping all other factor inputs unchanged.
Law of variable proportions—Marginal product of a factor input
initially rises with its employment level. But after reaching a
certain level of employment, it starts falling.
RECAP

Production Function
Production function refers to a mathematical relationship
between physical inputs used and physical output produced
by a firm. For various quantities of inputs used, it gives the
maximum quantity of output that can be produced.
• Short run production function shows the behaviour of
output when only one factor input is varied and the other
factor inputs are held constant. Assuming that there are
only two factors of production – Labour (L) and Capital
(K), in order to increase the output level the firm can
increase only quantity of the variable factor (say labour)
while keeping the quantity of the fixed factor (capital)
unchanged.
• Long run production function, on the other hand,
shows the behaviour of output when all the factor inputs
 are varied. The firm can increase output by increasing
both the factor inputs (labour and capital) simultaneously
and in the same proportion.
Total Product, Average Product and Marginal
Product
Suppose we vary a single factor input (say labour) and keep
the other factor input (capital) constant. Then for different
levels of the variable input (labour) we get different levels of
output, which is referred to as Total Product (TP) or Total
Physical Product (TPP) of the variable input.
Average product (AP): AP is defined as the output per unit of
the variable input. AP = TP/Units of variable input
Marginal product (MP): MP is defined as the change in
output per unit of change in the variable input (labour) when
all other inputs are held constant. MPL = DTP/DL or MPL=
(TP at L units) – (TP at L – 1 unit). MP is also called marginal
physical product (MPP).
Law of Variable Proportions (Law of returns to a
factor or Law of diminishing marginal product)
Returns to a factor refers to change in output when only one
factor input is changed, keeping all other factor inputs
unchanged.
Law of variable proportions says that the marginal product
of a factor input initially rises with its employment level. But
after reaching a certain level of employment, it starts falling.
(Refer to Figure 3.1 and Table 3.2)
There are three phases of production:
Increasing returns to a factor (Phase I)
Phase I: TP increases at increasing rate and MP increases (to
its maximum).
Reason: Initially variable input (labour) is too small as compared
to the fixed input (capital). When units of labour are increased,
the factor proportions become more suitable for the production
because efficient utilisation of capital takes place. This leads
to rise in productivity of the variable factor input. Therefore,
MP increases and hence, TP increases at increasing rate.
Diminishing returns to a factor (Phase II and III)
Phase II: TP increases at decreasing rate and MP falls but
remains positive.
Reason: After a certain level of employment of the variable
factor input (labour), the production process becomes
crowded with the variable factor input. There is pressure on
fixed input (capital). This leads to fall in productivity of
labour. Therefore, MP starts falling and hence, TP increases
at decreasing rate.
Phase III: TP falls; MP falls and becomes negative.
Reason: The amount of variable factor input (labour) becomes
too large in comparison to the fixed input (capital) causing
decline in TP and hence MP becomes negative.
Shapes of TP, AP and MP curves
Shape of TP curve: In phase I of production, TP increases at
increasing rate. Therefore, TP curve is convex in this phase.
In phase II, TP increases at decreasing rate. Therefore, TP
curve is concave in this phase. In phase III, TP falls. Therefore,
TP curve is downward sloping in this phase. Thus, the TP
curve looks like a S-shaped curve.
Shape of MP curve: According to the law of variable
proportions, initially MP of a variable factor rises. Then,
after a certain level of employment of the variable factor, MP
starts falling. Thus, the MP curve looks like an inverse U-
shaped curve in the input-output plane.
Shape of AP curve: As we increase the units of the variable
factor, initially MP rises. So, AP also rises but rises less than
MP. Then, after a point, MP starts falling. However, as long
as MP > AP, AP continues to rise. But when MP < AP, AP also
starts falling. So AP curve is also inverse ‘U’-shaped like MP
curve.
Relationship between AP and MP
1. When MP > AP, AP rises.
2. When MP = AP, AP is constant and maximum.
3. When MP < AP, AP falls.
At what point does the MP curve cut AP curve?
When AP rises, MP > AP. Otherwise, AP cannot rise.
Similarly, when AP falls, MP < AP. It follows that MP curve
cuts AP curve from above at its maximum point where MP =
AP.
NUMERICAL 1
1 1
Let the production function of a firm be Q = 5L2 K 2
Find out the maximum possible output that the firm
can produce with 100 units of L and 9 units of K.
(3 marks)
Solution: Substituting L = 100 and K = 9 in the given
production function, 1 1
2 2
Q = 5L K
Maximum possible output that the firm can produce,
1 1 1 1
2 2 2× 2×
Q = 5(100) (9) = 5(10) 2 3 2 = 5 × 10 × 3 = 150 units
Do it yourself 1
Let the production function of a firm be: Q = 2L2K2. Find
out the maximum possible output that the firm can produce
with 5 units of L and 2 units of K. (3 marks)
Solution of Do it yourself 1
Given Q = 2L2 K2 , L = 5, K = 2
Therefore, Q = 2 (5)2 (2)2 = 2 × 25 × 4 = 200
Thus, the maximum possible output that the firm
can produce with 5 units of L and 2 units of K is
200 units.
NUMERICAL 2

The following table gives the average product schedule

of labour. Find the total product and marginal product
schedules. It is given that the total product is zero at
zero level of labour employment. (3 marks)
Labour 1 2 3 4 5 6
AP of labour (Units) 2 3 4 4.25 4 3.50

Solution:
Labour (L) AP TP = AP × L MPL=TPL–TPL–1
1 2 2 2
2 3 6 4
3 4 12 6
4 4.25 17 5
5 4 20 3
6 3.50 21 1
Do it yourself 2
The following table gives the marginal product schedule of
labour. Find the total product and average product
schedules. It is given that the total product is zero at zero
level of labour employment. (NCERT) (3 marks)

Labour 1 2 3 4 5 6
MP of labour (Units) 3 5 7 5 3 1
Solution of Do it yourself 2
Labour (L) MP TP = Sum of MPs AP=TP ÷ L
1 3 3 3
2 5 8 4
3 7 15 5
4 5 20 5
5 3 23 4.6
6 1 24 4
NUMERICAL 3

Complete the following table: (3 marks)

Units of Labour 1 2 3 4 5 6
Average Product (Units) 8 10 - 9 - 7
Marginal Product (Units) - - 10 - 4 -

Solution:
Units of Average Marginal Total
Labour Product Product Product
1 8 8 8
2 10 12 20
3 10 10 30
4 9 6 36
5 8 4 40
6 7 2 42
Do it yourself 3
Complete the following production schedule: (4 marks)

Units of Total Physical Average Physical Marginal

variable input Product Product Physical Product
1 10 10 -
2 - 11 12
3 - - 8
4 35 - -
5 - - -5
Solution of Do it yourself 3
Units of Total Physical Average Physical Marginal Physical
variable Product Product Products
input (units) (units) (units)
1 10 10 10
2 22 11 12
3 30 10 8
4 35 8.75 5
5 30 6 -5
NUMERICAL 4

Identify giving reason the three phases of the Law of Variable

Proportions from the following: (3 marks)
Units of Variable Input 1 2 3 4 5
Total Physical Product 10 22 30 35 30
Solution:
Variable Input TPP MPP Phases
1 10 10
I phase
2 22 12
3 30 8
II phase
4 35 5
5 30 -5 III phase
Phase I: TP increases at increasing rate. MP increases. (Up to 2 units of the variable
input)
Phase II: TP increases at decreasing rate. MP falls but remains positive. (from 3 to 4
units of the variable input)
Phase III: TP falls. MP falls and becomes negative. (at 5th unit of the variable input)
Do it yourself 4
Giving reasons, find out the phase during which there are
increasing returns to a factor. (4 marks)
Units of Variable Factor (Labour) 1 2 3 4 5
Average Product (Units) 9 10 11 11.5 11
Solution of Do it yourself 4
Law of variable proportions
L AP TP MP Phase
1 10 10 10
I phase Increasing
2 22 11 12
returns to a factor
3 30 10 8
4 35 8.75 5
5 30 6 -5

Increasing returns to a factor means TP of the variable

factor (labour) increases at increasing rate and MP
rises. Up to 3 units of the variable factor (labour), there
are increasing returns.
Question 1
The average product curve in the input-output plane, will
be __________.
(Choose the correct alternative)
(a) an ‘S’ shaped curve
(b) an inverse ‘S’ shaped curve
(c) a ‘U’ shaped curve
(d) an inverse ‘U’ shaped curve

Objective Type Questions 3.1

Answer 1
(d) an inverse ‘U’ shaped curve

Objective Type Questions 3.1

Question 2
The marginal product curve in the input-output plane,
looks like ____________ .
(Choose the correct alternative)
(a) a ‘U’ shaped curve
(b) an inverse ‘U’ shaped curve
(c) an inverse ‘S’ shaped curve
(d) an ‘S’ shaped curve

Objective Type Questions 3.1

Answer 2
(b) an inverse ‘U’ shaped curve

Objective Type Questions 3.1

Question 3
When the Average Product (AP) is maximum, the
Marginal Product (MP) is:
(Choose the correct alternative)
(a) Equal to AP
(b) Less than AP
(c) More than AP
(d) Can be any one of the above

Objective Type Questions 3.1

Answer 3
(a) Equal to AP

Objective Type Questions 3.1

Question 4
_______ measures the productivity of a factor input.
(Choose the correct alternative)
(a) Total product
(b) Average product
(c) Marginal product
(d) Returns to a factor

Objective Type Questions 3.1

Answer 4
(b) Average product

Objective Type Questions 3.1

Question 5
____________, at any particular level of employment
of an input, is the average of all marginal products up to
that level.
(Choose the correct alternative)
(a) Total product
(b) Average product
(c) Marginal product
(d) Returns to a factor

Objective Type Questions 3.1

Answer 5
(b) Average product

Objective Type Questions 3.1

Question 6
_________ refers to change in output when only one
input is changed, other inputs remaining unchanged.
(Choose the correct alternative)
(a) Total product
(b) Average product
(c) Marginal product
(d) Returns to a factor

Objective Type Questions 3.1

Answer 6
(d) Returns to a factor

Objective Type Questions 3.1

Question 7
_____________ shows the pattern of change in total
product when only one input is increased, other inputs
remaining unchanged.
(Choose the correct alternative)
(a) Marginal product
(b) Average product
(c) Law of variable proportions
(d) Returns to a factor

Objective Type Questions 3.1

Answer 7
(c) Law of variable proportions

Objective Type Questions 3.1

Question 8
What is the behaviour of AP when TP increases
at decreasing rate?
(Choose the correct alternative)
(a) AP increases
(b) AP decreases
(c) AP may increase or decrease
(d) AP is constant

Objective Type Questions 3.1

Answer 8
(c) AP may increase or decrease

Objective Type Questions 3.1

Question 9
Which of the following statements accurately describe
the relationship between AP and MP?
(Choose the correct alternative)
(a) AP rises when MP is above it and falls when MP is
below it.
(b) MP intersects AP at its minimum point.
(c) AP an MP are always parallel to each other.
(d) AP is always rising when MP is falling and vice-
versa.

Objective Type Questions 3.1

Answer 9
(a) AP rises when MP is above it and falls when MP is
below it.

Objective Type Questions 3.1

Question 10
When average product increases, the marginal product
is:
(Choose the correct alternative)
(a) Less than average product
(b) Equal to the average product
(c) More than average product
(d) None of these

Objective Type Questions 3.1

Answer 10
(c) More than average product

Objective Type Questions 3.1

Question 11
What is the behaviour of TP, when MP becomes
negative?
(Choose the correct alternative)
(a) TP increases at an increasing rate
(b) TP increases at diminishing rate
(c) TP is maximum
(d) TP decreases

Objective Type Questions 3.1

Answer 11
(d) TP decreases

Objective Type Questions 3.1

Question 12
Both AP and MP curves are generally ___________ .
(Choose the correct alternative)
(a) U-shaped
(b) Inversely U-shaped
(c) Rising
(d) Falling

Objective Type Questions 3.1

Answer 12
(b) Inversely U-shaped

Objective Type Questions 3.1

Question 13
If AP of one unit of a variable factor is 12 units and that
of 2 units of the variable factor is 16 units, then the
marginal product of 2nd unit of the variable factor is
__________ .
(Choose the correct alternative)
(a) 28 units
(b) 20 units
(c) 4 units
(d) 44 units

Objective Type Questions 3.1

Answer 13
(b) 20 units

Objective Type Questions 3.1

Question 14
What is the shape of TP curve when MP falls and
becomes negative?

Objective Type Questions 3.1

 Answer 14
When MP falls and becomes negative, TP declines (phase III
of production). So,TP curve is downward sloping.

Objective Type Questions 3.1