Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Standard view
Full view
of .
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1
Production Theory

Production Theory



|Views: 878|Likes:
Published by macsain
What is production theory?
What is production theory?

More info:

Published by: macsain on May 14, 2009
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as DOC, PDF, TXT or read online from Scribd
See more
See less





Chapter- 04: Production TheoryProduction Theory:
Production function :
A production function represents input – output relationship.Q = f (X, Y, Z)Where, Q = output (or production volume)X = Labour Y = Landcalled input factors or factors of productionZ = CapitalQ = Dependent variablesXYZ = Independent variables
B)The Law of Diminishing Returns:
The Law of Diminishing Returns states that the additional or marginal product of avariable input factor X (say labour) successively decreases as we go on increasing thatinput factor at a particular point of time, other input factors Y (say land) and Z (saycapital) remaining fixed.
Example: Land = 1 Acre, Capital Tk. 10,000/- , Labour change as under-Labour (X)MPxTPxAPx
115151521732163185016.664156516.255127715.406784147084128-9759.38Where, MPx = Marginal product of input factor xTPx = Total product of input factor xAPx = Average product of input factor xMathematically, MPx = Δ TPx/ ΔX TPx = MPxi (i = 1 + n)MPx is the additional product produced by one additional unit of input factor X.TPx is the sum of all MPx.
Figure: MPx, TPx and APx
1stQtr 2ndQtr 3rdQtr 4thQtr MPxTPxApx
Relationship between MPx and TPx:
TPx is the sum of all MPx, that is TPx = ∑ MPxiWhen MPx > 0 then TPx increases.When MPx < 0 then TPx decreases.When MPx = 0 then TPx is at its maximum.Q. Why does the law of work (or function) in real time?Ans. In every production function there exists an optimal input factor ratio to get theoptimal output.
Return to scale:
a.Increasing returns to scale b.Constant returns to scalec.Decreasing returns to scalea.
Increasing returns to scale
- denotes a situation whereby a proportional increasein all input factors leads to a more-than-proportional increase in output. b.
Constant returns to scale
- denotes a situation whereby a proportional increase inall input factors leads to the same proportional increase in output.c.
Decreasing returns to scale
- denotes a situation whereby a proportional increasein all input factors leads to a less- than-proportional increase in output.
Example:Situation-1:Situation-2: Let us increase all input facto by 100% or two timesInputOutputInputOutputLand : 1 acreLabour : 3Capital: Total Tk 10,000/-Q= 50 monds paddyLand : 2 acreLabour: 6Capital: Total Tk 20,000/-Q= 110 or 90or 100 monds paddyWhen Q = 110; This is the case of increasing returns to scale.When Q = 90; This is the case of decreasing returns to scale.When Q = 100; This is the case of constant returns to scale.
(Iso- equal, quant- quantity)An isoquant represents equal amount of output that can be produced from differentcombinations of two input factors.Slope of isoquant = MRTS= MPx/MPy (MRTS- Marginal Rate of TechnicalSubstitution)
(means equal cost)An isocost shows equal amount of cost that a firm can incur from purchase of differentcombinations of two input factors.Slope of isocost = Px/Py
Figure: Isoquant Figure: IsocostLeast –cost or optimal input combination:
Two conditions need to be satisfied here:(a)Necessary condition:slope of isoquant = slope of isocost Figure:MPx/MPy = Px/Py(b)Sufficient condition:MPx/Px = MPy/ PyGraphically in point of tangency of an isoquant to the isocost line.Higher levels of combination show higher levels of output. Hence Q3 > Q2 > Q1
Chapter- 5: Cost Concepts, Relationships & Practical Applications

Activity (13)

You've already reviewed this. Edit your review.
1 hundred reads
1 thousand reads
Kamlesh Singh liked this
Monika Gogna liked this
Wajeeh Rehman liked this
Syedamudassara liked this
Ahamed Hisham liked this
t3ch_conc3pt liked this

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->