PRODUCTION FUNCTION

Unit - 3
 Production
Q. What is production?

 Production is an important economic activity which

satisfies the want and needs of the people.

 Production is a process of transforming inputs into

outputs. So, production means the creation of goods
and services. It is done to satisfy human wants. Thus,
production is a process of transformation.
 Production function
In simple words, production function refers to the
functional relationship between input (raw materials) used
and the resulting output (desire goods).

Input

Output
Production function is that function which
defines the maximum amount of that can be
produced with a given set of inputs.
- Michael R Baye
 Important facts about production
function

 A Production function is expressed with reference to a

particular period of time.
 It expresses a physical relation because both input and output
are expressed in physical terms.
 Production function describes a purely technological relation
because what can be produced from a given amount of input
depends upon the state of technology.
 Production function
It shows the technical relation between input
and output

Q = f (Ld, L, C,M,T,t)
Where:
Q- Quantity of the output produced
Ld- land and building
L- labour units
C -Capital employed
M - materials
T - Technology
t - time period of production
Basic function is Q = f ( L, C, M )
USES OF PRODUCTION
FUNCTION
 it will help to obtain maximum output

 It is very useful in taking longrun decision

Help the producer to determine whether

employing variable inputs/costs are profitable

It is help full to calculate the least cost input

combination for a given out put
 TYPE OF PRODUCTION
FUNCTION
The nature of production function i.e. how output varies
with change in the quantity of input depends upon the
time period allowed for the adjustment of inputs.

On the basis of production function classified into

two types:

 Short run production function .

 Long run production function.

 SHORT RUN V/S LONG
RUN
Short run Plant size is fixed labour is
variable.

Long run To increase

production firms increase
labour but cannot expand
their plant.
 Short run production functions:- At what rate the
output of a good changes when only one input is
varied and other input used in production of that good
are kept fixed. The resulting behavior of output is
termed as return to a factor.

 Long run production functions:- At what rate of

output of a good change when all the input used in
production of that good are changes simultaneously
and in the same proportion. The resulting behavior of
output is termed as return to scale.
 TWO TYPES OF FACTOR
INPUTS
 Fixed Inputs:- Fixed input are those factor the quantity
of which remains constant irrespective of the level of
output produced by a firms. For e.x
land,building,machines,tools,equipment,superior, type
of labour,top management etc.

 Variable inputs:- Variable input are those factor the

quantity of which varies with variations in the level of
output produced by a firms. For e.x raw material,
power fuel, transport labour etc.
Cobb–Douglas function:
The Cobb–Douglas functional form of production functions is widely used to
represent the relationship of an output and two inputs.
 Concept of
production

Total Average Marginal

Production production production

It is the sum It is the change in

total of all out It is the output total production as
put produced a result of
produced in per unit of change in
quantity of labour
a given labour
period of tine
AP = TP MP = TP
TP = AP X Ql
Ql Ql
 TOTAL, AVERAGE, AND MARGINAL PRODUCT
SCHEDULE CONSIDER A SMALL SANDWICH SHOP
NO.OF TOTAL PRODUCT AVERAGE PRODUCT MARGINAL
WORKERS PRODUCT
(TP) (AP)
PRODUCT (L) (MP)

0 ------ ------ ------

1 100 100 100
2 220 110 120 1st
3 360 120 140
4 520 130 160
5 650 130 130
6 750 125 100
7 840 120 90 2
sd

8 880 110 40
9 880 97.7 0
10 830 83 50 3rd
11 770 77 60
GRAPH OF LAW VARIABL
PROPORTION
 THREE STAGES OF PRODUCTION

STAGE:1 Average product

rising.
STAGE:2 Average product
declining.
(but marginal product positive )
STAGE:3 Marginal product is
negative or total product is declining.
 RELATIONSHIP BETWEEN
DIFFERENT PRODUCT
Between AP and MP
 when MP > AP,AP,increases.
 when MP<AP,AP,decreases.
 when MP=AP,AP is maximum.

Between TP and MP
 when TP at increasing rate,MP
increases increases.
 when TP increases at decreasing
rate MP
decreases.
 when TP maximum, MP is 0.

 when TP decreases,MP is negative.

Law of Diminishing Returns/ Law of Variable
Proportion

Law of Return to Scale

LAW OF DIMINISHING RETURNS/ LAW OF
VARIABLE PROPORTION
 Law of diminishing returns explains that when more and
more units of a variable input are employed on a given
quantity of fixed inputs, the total output may initially
increase at increasing rate and then at a constant rate,
but it will eventually increase at diminishing rates.
 In other words, the total output initially increases with
an increase in variable input at given quantity of fixed
inputs, but it starts decreasing after a point of time.
The assumptions made for the
application of law of diminishing returns
are as follows:

i. Assumes labour as an only variable input, while

capital is constant

ii. Assumes labour to be homogeneous

iii. Assumes that state of technology is given

iv. Assumes that input prices are given

LAW OF RETURN TO SCALE

The law of returns to scale describes the relationship

between variable inputs and output when all the inputs,
or factors are increased in the same proportion. The law
of returns to scale analysis the effects of scale on the
level of output. Here we find out in what proportions the
output changes when there is proportionate change in
the quantities of all inputs. The answer to this question
helps a firm to determine its scale or size in the long run.
Three kinds types of returns to scale are seen:

(1)Increasing Returns to Scale:

If the output of a firm increases more than in proportion to an
equal percentage increase in all inputs, the production is
said to exhibit increasing returns to scale.
For example, if the amount of inputs are doubled and the
output increases by more than double, it is said to be an
increasing returns to scale. When there is an increase in the
scale of production, it leads to lower average cost per unit
produced as the firm enjoys economies of scale.

(2)Constant Returns to Scale:

When all inputs are increased by a certain percentage, the
output increases by the same percentage, the production
function is said to exhibit constant returns to scale.
For example, if a firm doubles inputs, it doubles output.
In case, it triples output. The constant scale of
production has no effect on average cost per unit
produced.

(3) Diminishing Returns to Scale:

The term 'diminishing' returns to scale refers to scale

where output increases in a smaller proportion than
the increase in all inputs.

For example, if a firm increases inputs by 100% but

the output decreases by less than 100%, the firm is
said to exhibit decreasing returns to scale. In case of
decreasing returns to scale, the firm faces
diseconomies of scale. The firm's scale of production
leads to higher average cost per unit produced.
ISO QUANT
Production function with two variable inputs or equal product
curves
According to Ferguson, “ An isoquant is a curve showing all
possible combinations of inputs physically capable of producing
a given level of output”

An isoquant represents all those combinations of inputs

which are capable of producing the same level of output

An isoquant is also known as Production-Indifference

curve

An isoquant is also known as Production-Indifference

curve
Various combination of X and Y to produce a given level of
output

Each of the factor combinations A,B,C,D and E

represents the same level of production
Say 100 units.
 ISO QUANT
A firm uses one unit of labour and one unit of capital, point a, it
produces 1 unit of quantity as is shown on the q = 1 isoquant.
When the firm doubles its outputs by using 2 units of labour and 2
units of capital, it produces more than double from q = 1 to q = 3.

So the production function has increasing returns to scale in this

range. Another output from quantity 3 to quantity 6. At the last
doubling point c to point d, the production function has
decreasing returns to scale. The doubling of output from 4 units of
input, causes output to increase from 6 to 8 units increases of two
units only.
Properties of Iso quants
Isoquants are Negatively Sloped : They normally slope from left to right
means they are negatively sloped . The reason is when the quantity of one
factor is reduced , the same level of output can be achieved only when the
quantity of other is increased
Higher Isoquants Represents Larger Output :
Higher isoquant is one that is further from he point of origin. It represents a
larger output hat is obtained by using either same amount of one factor and
the greater amount of both the factors

No Two Isoquants Intersect or Touch each other : Isoquant do no

intersect or touch each other because they represent different level
of output
Isoquants are convex to the origin : In most production processes
the factors of production have substituability. Labour can be
substituted for capital and ice versa .
however the rate at which one factor is substituted for the other in
production process i.e marginal rate of technical substitution
(MRTS) also tends to fall
ISO-COST / EQUAL-COST LINE :-

Iso-Cost line represent the price of the factor. It shows various

combination of two factors which the firm can buy with, given
outlay.

Suppose a firm has Rs.1000 to spend on the two factors

X and Y.

If the price of factor X is Rs.10 and that of Y is Rs.20, the

firm can spend its outlay on X and Y or it can spend the
entire outlay on Y and buy 50 units of it with zero units of Y or
it can spend the entire outlay on Y and buy 50 units of it with
zero units of X factor. In between, it can have any
combination of X and Y.
One can show iso-cost line diagrammatically also. The X-axis shows the
units of factor X and Y-axis the units of factor Y. when entire Rs.1000 are
spend on factor X we get OB and when entire amount is spent on factor Y
we get OA. The straight line AB which joins point A and B will pass
through all combinations of factors X and Y which the firms can buy with
outlay of Rs.1000. The line AB is called Iso-cost line .
CONCLUSION
 Production function is simply a catalogue of production possibilities.
 It is an engineering concept and since money prices not appear in it, it merely
depicts the physical relationship between the output and inputs.
Economies of scale:
Economies of scale are cost advantages reaped by companies when production
becomes efficient. Companies can achieve economies of scale by increasing
production and lowering costs. This happens because costs are spread over a
larger number of goods.
Economies of Bi- products
INNOVATIONS AND GLOBAL
COMPETITIVENESS: