INSTITUTE OF EMINENT EDUCATION

(est. 2001)

Production
Production is defined as the transformation of inputs into output.
Definition of Production Function: A production function is an expression of
quantitative relation between change in inputs and the resulting change in
output. It is expressed as:

Where Q is output of a specified good and i 1 , i 2 .....i n are the inputs usable in
producing this good.
Short-run and Long-run Production Function
There are two types of production function:
(a) Short-run Production Function. It refers to production in the short-run
where there is at least one factor in fixed supply and other factors are in
variable supply. In short-run, production will increase when more units of
variable factors are used with the fixed factor. Fixed factors refer to those
factors whose supply cannot be changed during short-run. For example, land,
plant, factory building, minimum electricity bill, etc.
(b) Long-run Production Function. It refers to production in the long-run where
all factors are in variable supply. In the long-run, production will increase when
all factors are increased in the same proportion. Variable factors refer to those
factors whose supply can be varied or changed. For example, raw materials,
daily wages, etc.
Total Product (TP) : It is defined as the total quantity of goods produced by a
firm with the given inputs during a specified period of time. In the short-run, TP
can be increased by employing more units of the variable factor.
Shape of TP Curve: TP curve starts from the origin, increases at an increasing
rate, then increases at a decreasing rate, reaches a maximum and after that it
starts falling. Thus, as more units of variable factor is employed, it will not
always increase the TP.
Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

In the figure above, units of labour are shown on the x-axis and total product
on the y-axis. As the units of labour increase, TP curve increases at an
increasing rate till point A. Then TP curve increases at a decreasing rate till
point B. TP is maximum at point C. It falls after point C.

Average Product (AP) : It is defined as the amount of output produced per unit
of the variable factor (labour) employed. Symbolically,

Shape of AP Curve. As the units of variable factor are increased, AP curve starts
from the origin, increases at a decreasing rate, reaches a maximum and then
starts falling. AP curve is inverted-U shaped. As long as TP is positive, AP is
positive.

Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

it is clear that initially AP is zero when no labour is employed, then it increases

in the beginning when more units of labour are employed, reaches a maximum
and finally starts declining.
Marginal Product (MP)
Marginal Product (MP). It is defined as the change in TP resulting from the
employment of an additional unit of a variable factor (labour). Symbolically, MP
can be written as:

MP can also be calculated from the values of TP by the formula:

n = Number of labour units

Shape of MP Curve: MP curve is inverted U-shaped, MP curve rises initially,
reaches a maximum and then starts falling. When TP is maximum, MP is zero.
When TP falls, MP is negative.

Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

It is clear that initially MP value increases as the more units of labour are
employed, then MP value starts declining to become zero and then becomes
negative after that.

Relationship between TP, AP and MP

The relationship between TP, AP and MP is as follows:
1. AP curve is the slope of the straight line from the origin to each point on the
TP curve. MP curve is the slope of the TP curve at each point.
2. When AP is maximum, MP = AP.
3. When TP is maximum, MP = 0.
4. When TP is falling, MP is negative.
5. As long as TP is positive, AP is positive.
6. Both AP and MP curves are inverted U-shaped.

Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

Relationship between TP and MP

1. MP at any point on the TP curve is the slope of the TP curve at that point.
The value of slope rises, then falls till TP is maximum. (at that point slope of TP
curve is zero) and beyond that it is negative.
2. MP curve rises initially, reaches a maximum and declines after that.
3. When TP increases at increasing rate, MP increases.
4. When TP increases at decreasing rate, MP decreases and is positive.
5. When TP is maximum, MP is zero.
6. When TP falls, MP is negative. Its economic meaning is that additional
labourer slows down the production process, i.e., total output falls. This implies
that MP of that worker is negative.
7. TP is the area under the MP curve.

Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

Relationship between AP and MP

1. Both AP and MP curves are derived from the TP curve since,

2. When MP > AP, AP rises. [MP curve lies above AP curve. MP achieves its
maximum point and starts falling still AP rises. When both AP and MP curves
are rising, MP curve rises at a faster rate. The reason for rise in both AP and MP
values is under utilisation of the fixed factor.]
3. When MP = AP, AP is maximum. MP curve cuts AP curve at its maximum
point.
4. When MP < AP, AP falls. [MP curve lies below AP curve. When both AP and
MP curves are falling, MP curve falls at a faster rate. The reason for all in both
AP and MP values is full utilisation of the fixed factor.]
5. Both AP and MP curves are inverted ‘U’ shaped curve.
6. When MP is at its maximum, it is called point of inflexion.

Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

Returns to a Factor
Law of Variable Proportion: The law of variable proportion states that as we
employ more and more units of a variable input, keeping other inputs fixed,
the total product increases at increasing rate in the beginning then increases at
diminishing rate and finally starts falling.
That is, MP of a variable input initially rises, when the level of employment of
the input is low, but after reaching a certain level of employment, it starts
falling but is positive and finally continues to fall and becomes negative.
Assumptions of the Law:
1. State of technology remains the same.
2. All units of the variable factor, labour, are homogeneous.
3. There must always be some fixed input and diminishing returns results due
to fixed supply of the fixed factor.

Phase I. Phase of Increasing Returns It goes from the origin to the point where
the MP curve is maximum (i.e., from origin to point B). In this phases, TP curve
is increasing at an increasing rate. MP curve rises and reaches a maximum.
Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

The reasons for increasing returns are:

1. Underutilisation of fixed factor (land).
2. Indivisibility of factors.
3. Specialisation of labour.
A rational producer will not operate in this phase because the producer can
always expand through phase I. It is a non-economic range.
Phase II. Phase of Diminishing Returns It is the most important phase out of
the three phases. Phase II of production ranges from the point where MP curve
is maximum to the point where the MP curve is zero (i.e., from point B to C).
MP curve is positive but declining. TP curve increases at a decreasing rate and
reaches a maximum. A rational producer will always operate in this phase. The
law of diminishing returns operates in phase II.
The reasons for diminishing returns are:
1. Optimal use of fixed factor.
2. Lack of perfect substitutes between factors.

Phase III. Phase of Negative Returns It covers the entire range over which MP
curve is negative. In this phase, TP curve falls (after point C). A rational
producer will not operate in this phase, even with free labour, because he
could increase his output by employing less labour. It is a non-economic and an
inefficient phase.
The reason for negative returns is: Over utilisation of fixed factor

Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

Phase of Operation:
A rational producer will always seek to operate in phase 2.
In phase 1, employment of every additional unit of variable factor gives more
and more output. That is marginal product increases. It means, there is scope
of more profits if the production is increased with more units of variable factor.
In phase 3, MP of each variable factor is negative. So, this phase is ruled out on
the ground of technical efficiency and a rational producer will never produce in
this phase.
Thus, a rational producer will aim to operate in phase 2, as TP is maximum and
MP of each factor is positive.
Reasons Behind Increasing and Diminishing Returns to a Factor
The reasons for increasing returns to a variable factor are:
(a) Underutilisation of fixed factor. The fixed factor, land, is underutilised in
relation to labour employed on it. This helps in better utilisation of the fixed
factor. It results in increasing returns.
(b) Indivisibility of factors. The factors employed in the production process are
indivisible, i.e., they cannot be divided into smaller parts. Thus, when more
units of the variable factor are combined with the fixed factor, returns are
increasing.
(c) Specialisation and division of labour. As the number of labourers are
increased, specialisation and division of labour will lead to increasing returns.
The reasons for diminishing returns to a variable factor are:
(a) Optimum use of fixed factor. Returns start diminishing when the fixed
factor, land, is fully utilised in relation to labour employed on it. In other words,
the quantity of fixed factor is just right in relation to the quantity of the
variable factor.

Prepared By:
Vibha Gupta
(Proprietor)
 INSTITUTE OF EMINENT EDUCATION
(est. 2001)

(b) Lack of perfect substitutes between factors. All factors of production are in
scarce supply. When there is an imperfect substitutes of a factor with another
factor, returns start diminishing.

Prepared By:
Vibha Gupta
(Proprietor)