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Theory of Production

The document discusses production functions and their characteristics in the short-run and long-run. [1] A production function shows the relationship between inputs like capital and labor and the output produced. [2] In the short-run, one input is fixed while another is variable, exhibiting diminishing returns. [3] In the long-run, all inputs are variable, and isoquants show different combinations of inputs producing the same output.

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Anwesha Karmakar
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57 views13 pages

Theory of Production

The document discusses production functions and their characteristics in the short-run and long-run. [1] A production function shows the relationship between inputs like capital and labor and the output produced. [2] In the short-run, one input is fixed while another is variable, exhibiting diminishing returns. [3] In the long-run, all inputs are variable, and isoquants show different combinations of inputs producing the same output.

Uploaded by

Anwesha Karmakar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Theory of Production

Swapan Chakraborty
Production function

• A production function exhibits the algebraic


relationship between output and factors of
production given by the technology
Production function with two factors

• Sometime a production function is represented as the


relationship between output and factors, mainly
capital and labour;
Q = F( K ; L)
• Short-Run : When at least one of the factors is fixed
and rest are variable ; in two-inputs model capital is
assumed to be fixed in the short-run; labour is
variable.
• Long-Run: All the factors of production are
variable.
Short-run Production function

• Assuming labour to be variable factor and capital as


fixed factor;

• Marginal product of labour: Change in output due


to the change in the amount of labour employed;

• Average product of labour: Output produced


per-unit of labour; reflects labour productivity;
Short-run Production function

• Law of diminishing returns: as additional units of a


variable input are combined with a fixed input, after
some point the additional output (i.e., marginal
product) starts to diminish.

• In our short-run two factors production function, law


of diminishing return to the variable factor implies; as
more and more labour are employed over fixed stock
of capital; the additional output generated by extra
labour will start falling or marginal productivity of
labour starts declining.
Short-run Production function: Numerical
Example
Short-run Production function: Graphical
exposition
Short-run production: Three stages of
production
• Three stages of production:
• Stage I: When total product starting from zero
reaches to a point where the Average product is
maximum; such that AP =MP
• Stage II: When Average product started declining till
the point where marginal product is zero ;
• Stage III: When marginal product is zero and
thereafter;
Short-run production: Three stages of
production
Short-run production: Three stages of
production
• In which stage should a profit maximizing(rational)
firm operate?
Any rational producer avoids the first as well as third stages of production. Therefore,
producers prefer Stage II – the stage of diminishing returns. This stage is the most relevant
stage of operation for a producer according to the law of variable proportions.
Long Run production function

• Assuming a production function of the form;

When both capital and labour are variable.


Characteristics:
1. Marginal productivity of capital and labour are
positive.
2. Diminishing returns operate for both the factors.
Long Run production function: Iso-quandts

Definition: An Iso-quandt represents the locus of different


points in the (K,L) plane such that total quantity of output
produced along the curve remain same
Long-run production function: Returns to scale

• Returns to scale can also be described using the


following equation

hQ = f(kX, kY)

if h > k then IRTS or IRS


if h = k then CRTS or CRS
if h < k then DRTS or DRS

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