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Three Zone of Production Function

There are three zones of production: Zone I is suboptimal with MPP > APP and increasing returns. Zone II is optimal with MPP = APP and constant returns. Zone III is supraoptimal with MPP < 0 and decreasing returns. Optimum input occurs where MVP = Px and optimum output where MR = MC, maximizing profits.

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Namdev Upadhyay
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9K views

Three Zone of Production Function

There are three zones of production: Zone I is suboptimal with MPP > APP and increasing returns. Zone II is optimal with MPP = APP and constant returns. Zone III is supraoptimal with MPP < 0 and decreasing returns. Optimum input occurs where MVP = Px and optimum output where MR = MC, maximizing profits.

Uploaded by

Namdev Upadhyay
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Three zone of production function

Zone I
Starts from origin and ends at point where APP = MPP and APP is at maximum.
MPP > APP throughout this region.
MPP increasing up to point of inflation and then declines
APP is increasing throughout this region
TPP is increasing at increasing rate up to point of inflation and increases at decreasing rate after this
MVP > MIC
MR > MC
EP > 1 and at end of this zone Ep=1
Called as irrational zone ( Sub optimal)
Zone II
Starts from point where MPP = APP and ends at point Where MPP = 0 and TPP is maximum
MPP < APP throughout this region
App is decreases throughout this region
TPP is increasing at decreasing rate
MVP = MIC
MR = MC
Ep=1 at beginning and Ep=0 at end
Called as rational zone
Optimum point must be somewhere in this rational zone. It can, however, be located only when input
and output prices are known.
Optimum level of input
MVP = Px

Optimum level of output


MR = MC

Zone III
Starts from MPP = 0 i.e. TPP maximum
MPP becomes negative ie MPP < 0
APP declining but still positive
TPP is also decreasing at faster rate
MVP < MIC
MR< MC
Ep < 0
Called irrational or supra optimal zone
Producer should never operate in this zone even if the resources are available at free of cost. In case if
a farmer operates in this zone, he will incur double loss i.e.
1. Reduced Production
2. Unnecessary additional Cost of inputs.
Relationship between TPP, APP and MPP
A) Relationship between TPP and MPP

When TPP increasing MPP is positive, TPP constant when MPP is constant, when TPP is maximum
MPP is zero, and when TPP declines MPP becomes negative
As long as MPP is increasing, TPP increasing at increasing rate
TPP goes at an increasing rate till point of maximum MPP
After point of inflation As MPP declines the TPP increases at a decreasing rate
When MPP becomes zero, TPP attains its maximum
Negative MPP results in decreasing TPP
TPP
Increases
decreases
Maximum
MPP
Increasing
Maximum
Decreases
Zero

MPP
Positive
Negative
zero
TPP
Increases at increasing rate
At point of inflection
Increases at increasing rate
Maximum TPP

Constant

TPP increasing at increasing rate

B) Relationship between APP and MPP


When Marginal Product is more than Average Product, Average Product increases.
When Marginal Product is equal with the Average Product, Average Product is Maximum.
When Marginal Product is less than Average Product, Average Product

Decrease

AP > MP
AP = MP
AP < MP

APP increasing
APP is maximum
APP is decreasing

Determination of optimum level of input


MVP = MIC, Optimum level of input is at point where
MVP > MIC, profit is increasing with additional unit of input use, increase input use
MVP < MIC, profit is decreasing with additional unit of input use, cut off input use
Graphically

Mathematically

Determination of optimum level of output


MR=MC, profit maximizing level of output
MR > MC, profit is increasing with additional unit of output thus increase production
MR< MC, profit is decreasing with additional unit of output thus cut off production
Graphically
Cost/ return

MC
MR

Y*
Mathematically

Output (Y)

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