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Production Function

The document discusses the production function, which describes the relationship between inputs and outputs in economics. It outlines different types of production functions (very short run, short run, and long run) and explains concepts like total product (TP), average product (AP), and marginal product (MP), along with their relationships and phases of production. Additionally, it covers the law of returns to factors, detailing the stages of increasing, diminishing, and negative returns.

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Alok Shah
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11 views26 pages

Production Function

The document discusses the production function, which describes the relationship between inputs and outputs in economics. It outlines different types of production functions (very short run, short run, and long run) and explains concepts like total product (TP), average product (AP), and marginal product (MP), along with their relationships and phases of production. Additionally, it covers the law of returns to factors, detailing the stages of increasing, diminishing, and negative returns.

Uploaded by

Alok Shah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Agrawal Institute

Economics

Production Function
Production

It is a process of transformation of inputs into


outputs.
Production Function

It is a technical relationship between input and


outputs i.e.

Q = f (𝑰𝟏 , 𝑰𝟐 , 𝑰𝟑 ,…… 𝑰𝒏 )

Q = Output and I = Input


Inputs (Factors of Production)

Fixed Variable
Input Input

Fixed Inputs are


Variable Inputs are
those, the application
those, the application
of which does not
of which changes with
change with change
change in output.
in output.
Eg. Labour
Eg. Land
Types of Production Function
Very Short Run Production Function –
A period in which producer is unable to
change any factor of production (All factors are fixed)
Short Run Production Function –
A period in which output can be
changed by changing only one variable factor.
Long Run Production Function –
A period in which output can be
changed by changing all factors of production.
(No Fixed Factor)
Concept of Product
Product (Output) refers to the volume of goods
produced by a firm during a specified period of
time.

Total Product (TP) or Total Physical Product (TPP)

Average Product (AP)

Marginal Product (MP)


Note: - MP is the slope of TP
Fixed Factor Variable Factor TP AP MP Phase
(Land) (Labour)
1 0 0 0 0 Phase I
Increasing Returns to a Factor
1 1 5 5 5
1 2 14 7 9
1 3 24 8 10
1 4 28 7 4 Phase II
1 5 30 6 2 Diminishing Return to a Factor

1 6 30 5 0
1 7 28 4 -2 Phase III
Negative Return to a Factor
Concept of Product

Total Product (TP) – It refers the total quantity of goods


produced by a firm during a given period of time.

Average Product (AP) – It refers the amount of output


produced per unit of variable input.
𝑻𝑷
𝑨𝑷 =
𝒏
Marginal Product (MP) – It refers to change in total
product resulting from change in variable input.
∆𝑻𝑷
𝑴𝑷 = 𝒐𝒓 𝑴𝑷𝒏 = 𝑻𝑷𝒏 − 𝑻𝑷𝒏−𝟏
∆𝑵
Phases of Production

Phase I – TP increases at “Increasing Rate”


Or
MP increases

Phase II – TP increases at “Diminishing Rate”


Or
MP decreases (Positive)

Phase III – TP starts falling


Or
MP become negative
Relation between TP and MP

When MP increases then TP increases at


increasing rate.
When MP decreases (but remains positive) then
TP increases at diminishing rate.
When MP = 0 then TP is maximum
When MP becomes negative then TP falls
Relation between AP and MP

When MP > AP, then AP rises


When MP = AP, then AP is maximum
When MP < AP, then AP falls
Law of Returns to Factor (Law of Variable Proportions

Assumptions:
Only one input is variable i.e. labour.
All other factors are fixed.
All the units of variable factors are equally efficient.
Technique of production does not change.
It is possible to combine more and more units of variable
factors with the given units of fixed factors.
Law of Returns to Factor (Law of Variable Proportions

In terms of TP – This law states that TP first increases at


increasing rate, then increases at diminishing rate, reaches its
maximum and finally starts falling.

In terms of TP – This law states that MP first increases, then


decreases but remains positive and finally MP becomes negative.
Law of Returns to Factor (Law of Variable Proportions

Stage 1 (Increasing Returns to Factor)–


In this stage, TP increases at increasing rate, MP also
increases and reaches its maximum.

Reason –
• Optimum combination of inputs along with the full utilization of
fixed inputs.
• Division of labour through specialization.
Law of Returns to Factor (Law of Variable Proportions

Stage 2 (Diminishing Returns to Factor)–


In this stage TP increases at diminishing rate, reaches
its maximum. Every producer tries to operate in this stage. Also, in this
stage, MP falls but remains positive.

Reason –
• Efficiency starts declining when more variable inputs are
employed beyond the optimum capacity.
• Lack of perfect substitution between fixed inputs and variable
inputs.
Law of Returns to Factor (Law of Variable Proportions

Stage 3 (Negative Returns to Factor)–


In this stage, TP starts falling and MP becomes
negative.

Reason –
• Poor coordination between fixed and variable factors.
• Decrease in efficiency of variable factor.
Formulae

• TP = n × AP = ∑𝑴𝑷

• AP = TP ÷ n

∆𝑻𝑷
• 𝑴𝑷 = 𝒐𝒓 𝑴𝑷𝒏 = 𝑻𝑷𝒏 − 𝑻𝑷𝒏−𝟏
∆𝑵

n = Units of variable factor


1. Calculate Average Product (AP) and Marginal Product (MP):
Variable Factor (Units) 1 2 3 4 5 6
TP (Units) 8 16 24 29 29 25
2. Calculate Average Product (AP) and Marginal Product (MP):
Variable Factor (Units) 0 1 2 3 4 5 6 7
TP (Units) 0 3 8 12 15 17 17 16
3. Calculate TP and AP:
Variable Factor (Units) 1 2 3 4 5 6 7
MP (Units) 20 16 12 8 4 0 -4
5. Calculate TP and AP:
Variable Factor (Units) 1 2 3 4 5 6
MP (Units) 10 12 14 12 7 5
6. Calculate TP and MP:
Variable Factor (Units) 1 2 3 4 5
AP (Units) 50 45 40 35 30
7. Calculate TP and MP:
Variable Factor (Units) 1 2 3 4 5 6
AP (Units) 50 48 45 42 39 35
8. Find out the missing values:

Variable TP AP MP
Factor (Units) (Units) (Units) (Units)
0 …………. …………. ………….

1 …………. …………. 4

2 10 …………. ………….

3 …………. 6 ………….

4 24 …………. ………….

5 …………. 5 ………….
Example 5. Find out the missing values:

Variable TP AP MP
Factor (Units) (Units) (Units) (Units)
0 …………. …………. ………….

1 …………. 5 ………….

2 …………. …………. 8

3 …………. …………. 4

4 25 …………. ………….

5 …………. …………. 5
6 …………. …………. 0
7 …………. …………. -4

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