THEORY OF PRODUCTION

Sonu Chowdhury

1. PRODUCTION

2. PRODUCTION FUNCTION

3. SHORT RUN AND LONG RUN PRODUCTION FUNCTION

CONTENTS OF THE TOPIC

In general production means ‘any activity of making something material.”

In Economics production means ,” any economic activity which is directed to the satisfaction of the wants of the people.

Production means “creation or addition of utility.”

MEANING OF PRODUCTION

The processes and methods employed to transform tangible inputs (raw materials, and intangible inputs

(ideas, information, knowledge) into goods or services.

THE PROCESS OF TRANSFORMATION CAN BE

1. Form Utility

Changing the form of natural resources i.e. converting the

raw material into items processing utility.

2. Place Utility

Changing the place of resources from the place where they are of little use to another place where they are of greater

use.

Eg: Extraction from earth

3.Time Utility

Making available materials at times when they are not

normally available.

Thus production involves producing, storing, and distributing goods and services.

It’s an activity that increases consumer’s utility.

FACTORS AFFECTING PRODUCTION

Land Labour Machine Raw Material Capital Technology Entrepreneurship

PRODUCTION FUNCTION

The production function expresses the relationship between output of a good and different combination of inputs used in the production. (input output function)

The production function is written mathematically as:-

Q = F(L,N,K….), whereL=LandN = LabourK = Capital

Production function is studied according to the time perspective.

Thus there are two types of production functions.

Short run productionFunction.(Law of Variable Proportion)

Long run production Function.(Law of Returns to Scale)

CERTAIN TERMINOLOGIES

1. Total Product:- Total amount of output resulting form the use of different quantities of input.

2. Marginal Product:- Change in total product resulting from change of variable factor.

3. Average Product:- Total output No. of units of variable factor

SHORT RUN PRODUCTION FUNCTION.

One variable input case Law of variable Proportion Diminishing Marginal returns“ In short run, since all the factors cannot be

changed, it is assumed that only 1 factor can be changed while the others will be constant”

Law says,

“As more and more of factor input is employed, all other input quantities remaining constant, a point will be reached where additional quantities of varying input will yield diminishing marginal contributions to the total product”

Assumptions of the law:- One factor in production is variable and

other factors are fixed. It s possible to change factor proportions All units of variable factor are

homogeneous Technology is assumed to be given and

constant The law applies only in short period.

No. workers TP MP AP1 12 12 122 36 24 183 69 33 234 108 39 275 150 42 306 192 42 327 231 39 338 264 33 339 288 24 3210 300 12 3011 297 -3 2712 276 -21 23

Total Product

0

100

200

300

400

500

600

700

1 2 3 4 5 6 7 8 9 10 11 12

Total Product

No. of workers

-60

-40

-20

0

20

40

60

80

100

1 2 3 4 5 6 7 8 9 10 11 12 13

Marginal Product

Average product

No. of workers

-100

0

100

200

300

400

500

600

700

1 2 3 4 5 6 7 8 9 10 11 12 13

Total Product

Marginal Product

Average product

No. of workers

STAGE I Runs from 0 units of labour unit to the level where AP of labour is maximum

STAGE II

Follows Stage I proceeds to the point where MP of labour is zero. (Here TP is maximum)

STAGE III Follows Stage II and continues.

THE THREE STAGES

TOTAL PRODUCT

STAGE I:- Increases at an increasing rate.

STAGE II:- Increases at a diminishing rate and becomes maximum.

STAGE III:- Reaches maximum, becomes constant, and then starts declining.

MARGINAL PRODUCT

STAGE I:- Increases and reaches maximum

STAGE II:- Starts diminishing and becomes equal to Zero

STAGE III:- Keeps on declining and becomes negative.

AVERAGE PRODUCT

STAGE I:- Increases but slower than MP.

STAGE II:- Starts diminishing.

STAGE III:- Continues to diminish but must always be greater than zero.

Why Production Function is studied?

How much to produce? What type of technology to use? What input combination to use?“The firm seeks either to minimise cost of

production at given level of outputmaximise the output at a given level of

cost”

END OF THE CHAPTER