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Production Function

The document discusses key concepts in production economics including the production function, notions of productivity, types of production functions, and uses of the production function. It defines the production function as representing the relationship between inputs like capital and labor and maximum output. It also describes the differences between average product and marginal product, and how they relate to each other based on whether average product is increasing, decreasing, or constant. Finally, it outlines different types of production functions including fixed and variable proportions, as well as special functions like Cobb-Douglas.

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144 views16 pages

Production Function

The document discusses key concepts in production economics including the production function, notions of productivity, types of production functions, and uses of the production function. It defines the production function as representing the relationship between inputs like capital and labor and maximum output. It also describes the differences between average product and marginal product, and how they relate to each other based on whether average product is increasing, decreasing, or constant. Finally, it outlines different types of production functions including fixed and variable proportions, as well as special functions like Cobb-Douglas.

Uploaded by

vedhajuval
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction Production function Notions of productivity Relationship between MP & AP Types of production function Special production functions Uses

of production function

The theory of production economics is special in that the limits of economic behaviour are defined by the technical production possibilities. Production technology is the decisive factor regarding the quantity produced and how it may be produced.

The production function defines the technology available for producing output. It summarizes engineering knowhow in the relationship between inputs and outputs.

A production function can be an equation, table or graph presenting the maximum amount of a commodity that a firm can produce from a given set of inputs during a period of time Mathematically, the production function is: Q = f ( K, L) i.e., the maximum amount of output(Q) that can be produced with K capital & L labor

Two related, but distinct, notions of productivity can be derived from the production function. The average product of labor is the average amount of output per unit of labor AP = total product/ quantity of labor = Q/L The marginal product of labor is the rate at which total output changes as the firm changes its quantity of labor MP = change in total product/ change in quantity of labor = Q/L

When average product is increasing in labor, marginal product is greater than average product.(i.e.) if AP increases in L, then MP > AP. When average product is decreasing in labor, marginal product is less than average product. (i.e.) if AP decreases in L, then MP < AP. When average product neither increases nor decreases in labor, then marginal product is equal to average product.

TWO TYPES Short run production Long run production

A phase in which the organization can alter manufacturing by changing variable factors such as supplies and labor, but cannot change fixed factors such as capital. The behaviour of production in the short-run is called law of variable proportions.

A phase adequately long, so that all factors together with capital can be altered. The scale of production can be varied. The long run analysis of the laws of production is referred to as law of returns to scale.

Fixed proportion Variable proportion

Requires a fixed combination of inputs, say capital and labor, to produce a given level of output No possibility of substitution between the factors of production.

A given level of output factors can be produced by several alternative combinations of factors of production, say capital and labor. The factors can be combined in infinite number of ways

Linear Production Function: A production function that assumes a perfect linear relationship between inputs & total output Leontief Production Function: A production function that assumes that inputs are used in fixed proportions Cobb-Douglas Production Function: A production function that assumes some degree of substitutability between inputs

To compute the least-cost factor combination for a given output or the maximum output combination for a given cost. Helpful in deciding on the value of employing a variable factor in the production process.

By GANESH.M MBA B SEC AGBS

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