# THEORY OF PRODUCTION

Inputs in economics are known as factors of production these can be classified under 2 heads:

1.

Fixed factors :- fixed factors of production are those whose factor inputs cannot be changed at different levels of output in the short period. Eg: land, machinery etc. Variable Factor :- Variable factor inputs are those whose quantity will differ at different levels output. Eg : Labour, Raw material etc. There are 2 time periods under which production takes place.

2.

1)

Short Run : Some factor inputs are fixed while others are variable. The production in short run can be increased only by increasing. Quantity of variable factors. Long Run : All factors of production become variable the distinction between fixed & variable factor become irrelevant. the production in long run. can be increased by increasing all the factors of production. Production in economics is defined as transformation of input into output. Production includes physical goods & services both. Production function means relation ship between inputs used & resulting output. There are 2 types of production function

2)

1) Short Run Production function: It refers to production in the
short run where some factors remain fix & other is variable. In short run. product increases when more units of variable factors are used with the fixed factors. This is known as returns to a variable factors or law of variable proportions

2) Long Run Production function: It refers to production in a
time period when all factors are variable. The effects of the changes in all the inputs on total output is called returns to scale or Long Run Production function. CONEPTS OF PRODUCT

1)

Total product / Total physical product :- It is defined as the total quantity & services produced by a firm with the given inputs during a specified period of time or total product is sum total of output of each unit of variable factor used in the process of production. Thus

MP decreases but remains positive 3. AP = TP Variabl e Factor 0 1 2 3 4 5 6 7 8 TP AP TP L 0 4 5 6 6 5.6 20 20 – 4 = 16 L 2.8 (20 – 28) .is a net addition to total product when one more unit of variable factors employed MP = TPn.TPn-1 MP = ∆TP ∆L Average. 2. When TP is maximum & constant MP is O (zero) 4. MP is negative . MP also increases.6 4. When TP begins to fall. When TP increases at increasing rate.is the per unit production of the variable factors i.e. product :.8 2 MP TPn – TPn-1 0 4 6 (10 . When TP starts increasing at decreasing rate.2) 3) TP = Sum of MPs TP = AP X n Marginal Product :.4(16 – 20) Fixed Factor (Land) 10 10 10 10 10 10 10 10 10 0 4 10 18 24 28 28 Relationship between TP & MP 1.4) 8 (18 -10) 6 (24 -18) 4 (28 .24) 0 (28 – 28) .

When MP equals to AP. When MP is greater than AP. AP = TP & MP = ∆TP L ∆L 2.Relationship between AP & MP 1. AP rises but MP rises at faster pace. AP falls but MP falls at higher rate. AP is constant 4. When MP is less than AP. 3. Both AP & MP cures are derived from TP since. Y T A Total product TP Point of inflexion M O X L1 L2 L3 Unit of labour Stage I Stage II Stage III .

Diminishing Return :. M A AP O L1 L2 L3 Units of labour MP X Law of variable proportions or Returns to factor It states that as more & more units of a variable factor are applied to a given quantity of a fixed factor the total product may increase at an increasing rate initially but eventually it will increase at a diminishing rate. One factor of production is variable & others are fixed. The law applies only in the short run. Increasing returns :.In this stage. TP increase at increasing rate & later at the diminishing rate.TP increases at a diminishing rate till it reaches at maximum point & then becomes constant . All units of variable factor are homogeneous. Factor proportions can he changed. AP increases & reaches at its maximum MP initially increases then starts decreasing but continues to remain above AP 2. 2. 4. 5. There are 3 stages of law of Variable proportions 1.P. State of technology is given & remains the same. 3. Assumptions 1.Average and M.