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PRODUCTION

Production is concerned with the way in which resources


are employed to produce a firms product .
The Inputs are divided into fixed and variable.
Production function explains that the maximum output of
goods or services in specific time.
Production Function:Q = f (K, L)
QRepresents quantity of goods
KRepresents Capital employed
LRepresents Labor employed

Assumptions
Technology is assumed to be constant.
It is related to a specific time period.
Manufacturer is using the best technology.
All inputs are divisible.
Utilization for inputs at maximum level of efficiency.

Significance
It explains how a firm reaches most optimum
combination of factors so that unit costs are the lowest.
Combination of various inputs in order to produce
economically efficient output.
Estimate the quantity when the various factors of
production are combined.
Short term and Long term Production functions.

Short-Term production function


Capital (K) is constant.
Labor (L) is variable.
Law of Diminishing Returns.
Stages of Production.
Marginal product of Labor is extra output per unit
change in labor.
Average Product is total product divided by quantity of
labor.

Long-Run Production Function


A firm can change all of its inputs in long run, So no
fixed and variable inputs here.
The increase in total output as input increases is
calledreturns to scale.
Increasing returns to scale.
Constant returns to scale.
Decreasing returns to scale.

coefficient of output elasticity


One way to measure returns to scale is to use coefficient of output
elasticity.
EQ = Percentagechange in Output (Q)
Percentage change in all inputs
EQ > 1, represents increasing returns to scale (IRTS).
EQ = 1, represents constant returns to scale (CRTS).
EQ < 1, represents decreasing returns to scale (DRTS).