.Theory of Production - Edited
.Theory of Production - Edited
.Theory of Production - Edited
Understanding MP AP curves :
Observation: From the table, we can see that MP initially increases up to 3 rd unit of labour and then
starts to fall.
For AP: We can see that AP also increases up to 3rd unit of labour and then starts to fall.
Conclusion: Both MP & AP curves will be of ‘inverted-u’ shape.
Graphical Representation of MP & AP curves
The rate of increase of MP > the rate of ↑ in AP [when MP > AP, AP↑]
The rate of fall of MP > the rate of fall in AP [when MP < AP, AP ↓]
[In short MP rises steeply / rapidly as compared to AP and also falls rapidly in contrast to AP]
Production Function:
It is the functional relationship between inputs and outputs.
Q = f (L, l, K, E)
Short Run Production Function: When some factors are fixed and some are variable.
Factors Proportions may vary as only the variable factors are changed and other factors
undergo zero change.
E.g.: Law of variable proportions.
(L) (TP/L)
Land TP Remarks
Labour AP
1 1 2 2 - STAGE-I
Increasing Returns
1 2 5 2.5 3
MP>AP
1 3 9 3 4
Graphical Representation:
1 4 12 3 3
There are total 3 stages of production as follows: Operates up to MP = AP
1 5 14 2.8 2
1 Stage 1: 6 15 2.5 1
It is known as the stage of increasing returns.
1 7 15 2.14 0
Here TP increases at an increasing rate as MP is constantly rising.
Point of inflexion is reached when MP is maximum. STAGE-III -ve MP
1 8 14 1.75 -1
Negative
[Point of inflexion refers to a specific point after which returns
the curve changes its
trajectory (Shape)]
MP is increasing.
TP curve is concave in shape.
The stage ends where MP = AP (or at the maximum point of AP)
Reasons of increasing returns:
i. Indivisibility of fixed factor (Land)
ii. Efficient utilization of resources
Stage 2:
It is called the stage of Diminishing returns.
Here TP increases at decreasing rate as MP is constantly falling.
MP is falling.
TP becomes maximum when MP = 0.
2nd stage is known as the rational stage of production. This is so because we are getting the
maximum O/P in this stage (TP is max in 2nd stage) and hence we are able to reach optimum
combination/ratio b/w (fixed factor) and labour (variable factor).
Returns to Scale:
Assumptions:
i. The firm has only 2 factors of production that are capital and labour.
ii. Both labour and capital are combined in fixed proportions for different combinations.
iii. No change in price of factors.
iv. Fixed state of technology.
Law:
In the long run, when all factors are variable, the production can be increased by changing the
proportions of all factors. Initially, the firm experience increasing returns to scale, then it shifts to
constants returns to scale and finally the stage of diminishing returns to scale.
Observation:
Observation: Observation:
Distance between isoquants
Distance between isoquants Distance between
is equal i.e., equidistant.
is decreasing. isoquants is increasing.
Reason: Economies to
Reason: Economic to scale. Reason: Dis-economies
scale = Dis-economies to to scale
scale.
Note: Economics to scale refers to a fall in per-unit cost due to expansions of production (Output).
Dis-economies to scale refers to an increase in per unit of cost due to expansion of output.
Return To Scale at Glance
Explanation:
Increasing Returns:
Up to I3
Distance b/w IQ decreasing.
Prop △ in O/P > prop △ in input.
Reason: Economics to scale.
Constant Returns:
Up to I6
Equidistant IQs
Prop △ in O/P = prop △ in input.
Reason: Economics to scale offset the dis-economies.
Decreasing Returns:
I6 onwards
Distance b/w IQs increases.
Proportionate △ in O/P < proportionate △ in input.
Reason: Dis-economies to scale.