Production Analysis

UNIT-3

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 Fixed vs. Variable Inputs
• Fixed inputs -resources used at a constant amount in
the production of a commodity.
• Variable inputs - resources that can change in
quantity depending on the level of output being
produced.
• The longer planning the period, the distinction
between fixed and variable inputs disappears, i.e., all
inputs are variable in the long run.

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 Production Analysis with One Variable
Input
• Total product (Q) refers to the total amount of
output produced in physical units (may refer to,
kilograms of sugar, sacks of rice produced, etc)
• The marginal product (MP) refers to the rate of
change in output as an input is changed by one
unit, holding all other inputs constant.

TPL
MPL 
L

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 Total vs. Marginal Product
• Total Product (TPx) = total amount of output
produced at different levels of inputs
• Marginal Product (MPx) = rate of change in output
as input X is increased by one unit, ceteris paribus.

TPX
MPX 
X

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 Production Function of a Rice Farmer
Units of L Total Product Marginal Product
(QL or TPL) (MPL)
0 0 -
1 2 2
2 6 4
3 12 6
4 20 8
5 26 6
6 30 4
7 32 2
8 32 0
9 30 -2
10 26 -4
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 QL

32
30
26 QL
Total product

20

12

2
L
0 1 2 3 4 5 6 7 8 9 10

Labor

FIGURE 5.1. Total product curve. The total product curve shows the behavior of total product vis-a-vis an input (e.g.,
labor) used in production assuming a certain technological level.

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 Marginal Product
• The marginal product refers to the rate of change
in output as an input is changed by one unit,
holding all other inputs constant.
• Formula:

TPL
MPL 
L

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 Marginal Product
• Observe that the marginal product initially increases,
reaches a maximum level, and beyond this point, the
marginal product declines, reaches zero, and
subsequently becomes negative.
• The law of diminishing returns states that "as the
use of an input increases (with other inputs fixed), a
point will eventually be reached at which the
resulting additions to output decrease"

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 Total and Marginal Product

35

30

25

20
TPL

15

10

5
MPL
0
0 1 2 3 4 5 6 7 8 9
-5

-10

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 Law of Diminishing Marginal Returns

• As more and more of an input is added (given

a fixed amount of other inputs), total output
may increase; however, the additions to total
output will tend to diminish.
• Counter-intuitive proof: if the law of
diminishing returns does not hold, the world’s
supply of food can be produced in a hectare of
land.

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 Average Product (AP)

• Average product is a concept commonly associated

with efficiency.
• The average product measures the total output per
unit of input used.
– The "productivity" of an input is usually expressed in
terms of its average product.
– The greater the value of average product, the higher the
efficiency in physical terms.
• Formula: TPL
APL 
L
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 TABLE 5.2. Average product of labor.
Total product of Average product of
Labor (L) labor (TPL) labor (APL)
0 0 0
1 2 2
2 6 3
3 12 4
4 20 5
5 26 5.2
6 30 5
7 32 4.5
8 32 4
9 30 3.3
10 26 2.6

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 The slope of the line from the origin
is a measure of the AVERAGE

Y rise Y
Slope = 
run L

a b Y

Rise = Y

L1 L2 L
0 Run = L

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 The average product at b is highest.
Total
AP at c is less than at a.
Product
Q AP at d is less than at c.

c
b
d
QL

0 L

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 Q Highest Slope of Line
from Origin
Max APL

Inflection point
Max MPL TPL

0 L1 L2 L3 L

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 Relationship between Average and
Marginal Curves: Rule of Thumb
• When the marginal is less than the average,
the average decreases.
• When the marginal is equal to the average,
the average does not change (it is either at
maximum or minimum)
• When the marginal is greater than the
average, the average increases

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 AP,MP

At Max AP,
MP=AP

Max MPL
Max APL

APL

0 L1 L2 L3 L
MPL
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 TP
TPL

0 L1 L2 L3 L
Stage I Stage II Stage III
MP>AP MP<AP
AP,MP AP increasing AP decreasing
MP<0
AP decreasing
MP still positive

APL

0 L1 L2 L3 L
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 Three Stages of Production
• In Stage I
– APL is increasing so MP>AP.
– All the product curves are increasing
– Stage I stops where APL reaches its maximum at
point A.
– MP peaks and then declines at point C and
beyond, so the law of diminishing returns begins
to manifest at this stage

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 Three Stages of Production
• Stage II
– starts where the APL of the input begins to
decline.
– QL still continues to increase, although at a
decreasing rate, and in fact reaches a maximum
– Marginal product is continuously declining and
reaches zero at point D, as additional labor inputs
are employed.

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 Three Stages of Production
Stage III starts where the MPL has turned
negative.
– all product curves are decreasing.
– total output starts falling even as the input is
increased

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