CHAPTER

Production Function
INTRODUCTION
 Production - Producer side
 A producer makes use of various inputs
to produce Goods and services
 Example, leather is of no use as is it on
raw form until it is transformed into some
desirable products like shoes, bags etc.
 Production refers to the transformation of
inputs into outputs.
 Example – to produce shoes( output), we
need various inputs like labour, capital,
leather, land etc.
EXAMPLE OF A
PRODUCTION PROCESS
PRODUCTION FUNCTION
 Expression of the technological
relationship between physical inputs
and outputs of a good.
 Ox= f(i1,i2,i3………in)
Where
 Ox= output of a commodity
 F= functional relationship
 i1,i2,i3 are the inputs used
 Higher inputs= higher output
EXAMPLE
 Suppose a firm manufactures shoes with
help of 2 inputs say,
 L= Labour
 K- capital
Production function
0 shoes = f(L,K)

 200= f(3L,4K)
 3:4 is the ratio of labour and capital
FEATURES OF
PRODUCTION FUNCTION
 1. PF will specify the maximum output
that can be produced with minimum
quantity of inputs
 PF is the relationship between inputs
and outputs ( Technical relationship)
 PF is always with respect to technology,
if technology improves output will also
improve.
 PF includes the technically efficient
methods of production as no producer
will employ the inefficient methods of
production.
SHORT RUN AND LONG
RUN

 The functional relationship between

change in output due to change in
inputs can be studied in two phases.

 Production with respect to time period

SHORT RUN AND LONG
RUN
 Short run
 In which the output can be changed by
changing the variable factors
 In short run Fixed factors like plant,
machinery, building etc can not be
changed.

 If a firm under short run wants to increase

its production , then this objective can be
increased by increasing the raw
material , number of workers with
existing factory, plants and equipments
SHORT RUN
 A production function of firm A
Q= f(L:K)

 variable fixed
 100= f(2L:4K)

 150=f(4L:4K)

 200= f(6L:4K)
 SHORT RUN AND LONG
RUN
 Long run
 In which output can be changed by changing all the
factors of production( Fixed and Variable factors)
 A firm has enough time to adjust all its
inputs.
 A firm can even change its factory size,
technology , machinery etc.

 In the long run a firm can change its factory

size, purchase new machinery, switch to new
techniques of production.
 NO FIXED FACTORS
LONG RUN
 A production function of firm A
Q= f(L:K)

variable variable
 100= f(2L:4K)

 200=f(4L:8K)

 400= f(8L:16K)
IMPORTANT POINTS ABOUT
SHORT RUN AND LONG RUN
 The distinction between short run and
long run does not refer to calendar
period and is not refer to fixed
period.

 The Time period is more functional in

nature , which depends upon
production conditions.

 Example: A period of 10years may be a

short run for steal industry while a
period of 1 year could be long year for
DIFFERENCE BETWEEN
SHORT RUN AND LONG RUN
Basis Short Run Long Run
Meaning Output can be Output can be
changed by changed by
changing the changing all the
variable factors factors of
production
Classification Factors classified All factors are
as variable factors variable in long run
and fixed factors
Price In SR, demand is In long run, both
determination more active as demand and
supply cannot be supply play equal
increased roles in price
immediately with determination as
increase in both can be
demand increased.
VARIABLE FACTORS AND
FIXED FACTORS
 Variable factors – those factors which
can be changed in short run . Example:
raw material, labour, power etc.
 Variable factors vary directly with
the output.
 Output = Demand for variable
factors

Variable factors are not required with

zero level of output.
FIXED FACTORS
 Those which cannot be changed in short
run
 Example: plant , machinery, building,
land etc.

Quantity of fixed factors remain fixed

irrespective of output , they don’t
changes even if output rises, falls
or become zero
DIFFERENCE BETWEEN VARIABLE
FACTORS AND FIXED FACTORS

Basis Variable factors Fixed factors

Meaning Those factors Which can be
which can be cannot be changed
changed in short in short run
run
Relation with They vary directly They do not vary
output with output directly with
output
Example Raw material, Building, plant,
power, labour, fuel machinery ,
etc permanent staff
etc.
TYPES OF PRODUCTION
FUNCTION
1. Short run production function ( Variable
proportion type)

2. Long run production function( constant

proportion type)
SHORT RUN PRODUCTION
FUNCTION
 Refers to a situation where output is
increased by changing only one input
while keeping all other inputs
unchanged.

Most important : As there is

difference in variable input only,
the ratio between different input
tends to change at different levels
of output
LONG RUN PRODUCTION
FUNCTION
 Refers to a situation when output is
increased by increasing all the inputs
simultaneously and in same proportion

As all inputs are varied in long run ,

the ratio between different inputs
tends to remain the same at
different levels of output.
CONCEPT OF PRODUCT
 Product refers to the volume of goods
produced by a firm or industry during
specific period of time

 3 types
 1. Total product ( TP)
 2. Average product( AP)
 3. Marginal Product ( MP)
TOTAL PRODUCT ( TP)
 Total quantity of goods produced by a
firm during a given period of time with
given number of inputs

Example : if 5 workers producing 100

units
Then TP= 100

TP is also known as TPP( Total

Physical product), Total returns,
Total output )
AVERAGE PRODUCT(AP)
 Refers to output per unit of variable input
 Also known as Average return or Average
physical product(APP)

 For example:
 If 5 workers are producing 100 units
Average product will be
AP= Total Product( TP)/ Units of variable
factors(n)
AP= 100/5
AP= 20
Or
TP= AP X units of variable factor
MARGINAL PRODUCT(MP)
Refers to addition to total product when
one more unit of variable factor is
employed
1st Method : MPn= TPn- TPn-1
Where n= units of variable factor
TPn-1= Total product of (n-1) units of
variable factor
TPn= Total product of n units of
variable factor
MPn= marginal product of nth unit of
variable factor
 1 lb – 20 units
2 lb – 35 units
3 3 lb- 45

 Marginal change – 15

 TP (2)- TP(1)
MP EXAMPLE
 If 10 labours are producing 70 kgs of
rice and 11 laboures are producing 80
kgs of rice

 Then MP of 11th labour will be

 MPn= TPn-TPn-1
 = TP(11 Units)- TP(11-1) units
 TP(11 Units)- TP(10) units
 80 kgs – 70 kgs
 MPn= 10 kgs
 2nd Method to calculate MP
 MP= Change in total product / change in
units of variable factor
MP= ∆TP/ ∆n
 Example : If 10 labours are producing
70 kgs of rice and 11 laboures are
producing 80 kgs of rice

 MP= 80-70/ 11-10

 MP= 10 kgs
RETURNS TO FACTOR: LAW
OF VARIABLE PROPORTIONS
 Returns to factor: Increase in the total
product( returns) when only one factor
is increased, keeping all the other
factors as constant

 In short run when only one input is

variable and all others are fixed , the
firm has law of variable proportions
( LVP)
 LVP is the most important law of
production as it shows the rate of
change of output due to change in only
one variable factor of production

 LVP is also known as ‘laws of return,

‘laws of return to factor,’ ‘returns to
variable factor’
STATEMENT OF LVP
 LVP stats that as we increase quantity of
only one input keeping all other inputs
fixed, total product(TP) initially increase
at increasing rate , then at decreasing
rate and finally at negative rate
 According to LVP, TP and MP can be
classified in 3 phases
 Phase 1: TP rises at a increasing rate

 Phase 2 TP rises at decreasing rate

 Phase 3: TP falls
ASSUMPTIONS OF LAW OF
VARIABLE PROPORTIONS
 It operates in short run , as factors are
classified as variable and fixed
 Under LVP, different units of variable factors
can be combined with fixed factors
 The effect of change in output is due to
variable factors only.
 Law applies to field of production
 It is assumed that factors of production
become imperfect substitutes of each other
beyond a certain limit.
 State of technology is assumed to be
constant.
EXAMPLE OF LVP
Suppose a farmer has 1 acre of land ( fixed factor) on
which he wants to increase the production of wheat with
the help of variable factor
Fixed Variable TP ( Units MP Phase
Factor factor ) ( Units)
( Land) ( Labour)
1 1 10 10 Phase 1
( increasin
g returns )
1 2 30 20 Phase 1
1 3 45 15 Phase
2( Diminis
hing
returns)
1 4 52 7 Phase 2
1 5 52 0 Phase 3
1 6 40 -12 Phase 3
GRAPHS
 TP is at point of inflextion – MP Max
 TP Max- MP zero
 TP falls , MP zero
PHASE 1
Increasing returns to a factor ( TP
Increase at increasing rate)
Every additional unit adds more and
more to a variable factor

It happens because initially the quantity

of variable input is too small, when
production increase efficient use of fixed
inputs raises the productivity of variable
factor
PHASE 2
 Diminishing returns to factor( TP
increases at a diminishing rate)

 Every additional variable factors adds

lesser and lesser amount of output
 It happens after a certain level of output
, pressure on fixed inputs leads to fall in
the productivity of variable input.
PHASE 3
 Negative returns to factor

 Additional variable factors tend to

decline TP

 It happens because the amount of

variable factor become too large in
comparison to fixed factors which
results in decline of TP.
REASONS FOR LVP
 Reasons for increasing returns ( Phase
1)

 1. better utilization of fixed factors

 2. Increased efficiency of variable
factors
 3. Indivisibility of fixed factors
REASONS FOR LVP
 Reasons for Diminishing returns to
factor( phase 2 )
 Optimum combination of factors
 Over utilization of fixed factors
 Imperfect substitution
REASONS FOR LVP
 Reasons for negative returns ( phase 3 )

 Limitation of fixed factors

 Poor coordination between variable
factors and fixed factors
 Decrease in the efficiency of variable
factor
LAW OF DIMINISHING
RETURNS
 When more and more units of a variable
factor is employed with fixed factors,
then MP of variable factor will fall.

 Also known as law of diminishing

marginal product.
TABLE OF LAW
Fixed Variable TP MP
factor factor
( land) ( labour)
1 1 12 12
1 2 22 10
1 3 30 8
1 4 36 6
1 5 40 4
DIAGRAM
 This law only considers the falling phase
of MP and ignores the rising MP
RELATIONSHIP BETWEEN
TP AND MP
Fixed Variable TP MP
factor factor
1 0 0 -
1 1 10 10
1 2 30 20
1 3 45 15
1 4 52 7
1 5 52 0
1 6 48 -4
 As long as TP increases at increasing
rate , MP rise
 When TP increase at decreasing rate ,
MP starts to fall
 When TP reaches maximum, MP is zero
 When to declines, MP becomes negative
.
RELATIONSHIP BETWEEN
AP AND MP
Fixed Variable TP AP MP
factor factor
1 0 0 -
1 1 10 10 10
1 2 30 15 20
1 3 45 15 15
1 4 52 13 7
1 5 52 10.40 0
1 6 48 8 -4
 As long as MP is more than AP , AP rise
 When MP is equal to AP, AP is at is
maximum
 When MP is less then AP , AP falls
 Both AP and MP will fall, MP becomes
negative , MP falls faster in comparison
to AP
QUESTIONS
 Calculate AP and MP
Variabl 0 1 2 3 4 5
e
factors
Total 0 8 20 28 28 25
product
( TP)
 Calculate AP and MP from the followings
Land Labour TP(units)
1 0 0
1 1 20
1 2 50
1 3 90
1 4 120
1 5 140
1 6 150
1 7 140
1 8 120
 Calculate TP and AP

Variable factor MP
1 24
2 20
3 16
4 12
5 8
6 0
7 -8
 Calculate TP and MP
Variable factors AP
1 8
2 10
3 8
4 6
5 4
 Find out the missing figures
Variable TP AP MP
factors
0
1 5
2 8
3 4
4 25
5 5
6 0
7 -4
 Complete the table
Units of Average Marginal
labour product product
1 8
2 10
3 10
4 9
5 4
6 7
CALCULATE AP AND MP
Labour TP
0 0
1 15
2 35
3 50
4 40
5 48
 Calculate TP and MP

Labour AP
1 2
2 3
3 4
4 4.25
5 5
6 3.50
Labour MP
1 3
2 5
3 7
4 5
5 3
6 1
 Production function is given as
 Q=2L²K². find out maximum output
possible that a firm can produce with 5
units of L and 2 units of K.
 Find out maximum possible with 0 unit
of L and 10 unit of K
 Q= 5L+2K
 Find out maximum possible output with
0 units of L and 10 units of K