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eco (Delhi10)

# eco (Delhi10)

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03/23/2013

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THEORY OF PRODUCTION
Production theory deals with physical relationship i.e. technical & Technological relations between input & between Output & inputs.
PRODUCTION

Means a process by which a commodity or commodities are transformed intoa different usable commodity.
INPUT OUTPUT
(Called manufacturing)Services like transport, legal, medical consultancy, storage for future use, wholesaling, retailingare also productive activities.
INPUT & OUTPUTINPUT
Inputs are of two types1.Fixed2.Variable
1.
Fixed
whose supply is inelastic in short run. All its users can’t employ more of it inshort run. E.g. plant, machinery, building.
2.
Variable factors
Whose supply in short run is elastic e.g. labour & raw material
OUTPUT

Goods & services that comes out of production process.
SHORT RUN & LONG RUNSHORT RUN

Supply of certain inputs is fixed production can be increased by increase in useof variable inputs.
LONG RUN
Supply of all inputs is elastic but not enough to permit a change in technology.
PRODUCTION FUNCTION
Production function is a tool of analysis used to explain the relationship between input & output.It describes the technological relationship between input & output.It tells that production depends on certain ships. It can be in the form of specific inputs.
Schedule
Table
Graphed line
Curve
An algebra aqua
Mathematical modelClassification of input by economist
Land
Labor
Capital
Raw material
Time
SpaceE.g.a = f (K, L)K = CapitalL = Labor
Assumptions
(i)Perfect divisibility of both inputs & outputs.(ii)Limited substitution of one factor for the other.

(iii)Constrict technology(iv)Inelastic supply of fixed factors in the short-term.
Laws of Production
Laws of variable proportions laws of returns to scale (long-run)
Law of Returns to variable proportions of fixed factors
Law of Diminishing Returns (or variable proportion) Relationship between varying facto proportions & output when more & more units of a variable input are applied to a given quantityof fixed inputs the total output may initially increase at an increasing rate & then at a constantrate but it will eventually increase at diminishing rates. I.e. the marginal increase in the totaloutput eventually decreases when additional units of variable factors are applied to a givenquantity.Here we take K (capital) as constant & Labor (L) as variableQ = f (L) MP
L
= TP
N
– TP
N-1
(first derivative of the Production Function)Total OutputTP(Total Production) Labour Marginal &Average Prod.AP
L
LabourMP
L
In stage I
The first increases MP
L
also increase TP
L
continues to increase but at diminishing rate.

In stage II
I.e. after 5
th
worker. TP
L
is max at the employment of 10
th
worker beyond this level of output TP
L
decreases in stage III.
Factors Behind the Laws of ReturnsStage I
– Law of increasing returns is an operation.
Stage II
– Law of diminishing returns is in application.FactorsIndivisibility of fixed factor (capital)- (Results in under utilization of capital of labor are less than its optimum number). If less than 6workers is underutilizing of K.- (Increase in labor productivity is that employment of additional workers leads to advantages of division of labor until optimum capital labor combination is reached because of specialization of labor)Once optimum capital labor rate is reached employment of additional workers will amount tosubstitution of capital with labor. But there is a limit to which one input can be substituted for another i.e. elasticity of substitution between input is not in fete. Also difficult to assignspecialized task & return of firm must operate
Assumptions excessive
-Technology remains unchanged-Input prices.-Variable factors are homogenous
Application of the Law of Diminishing Returns.
Empirical Law is not applied universally
Technology remains fixed effect of an additional input when technology changes can’t beexplained.
Is all input are increase in all input
How much to produce
What no. Of workers to apply to a given fixed input.
Marginal Revenue Productivity & Labor Employment
Equip-marginal Principal – Marginal revenue productivity of labor equals the marginal wags rate.The marginal revenue productivity is the value of product resulting from the marginal unit of variable input (labor).MRP=MPP xP(Marginal revenue Product)(Marginal Physical Productivity) x (Price)When MRP = wage rate tells the no. of labor to be employed.Profit is max when MR = MCP1 PAW=MWWMRP & MW