Chapter-5 PRODUCTION FUNCTION

INTRODUCTION

Production refers to transformation of inputs into output.

PRODUTION FUNCTION

Production function is an expression of the technological relation between physical inputs and output of a
good. Equation of Production Function : Q = ( L. K) where L stands for labour , K stands for capital.

Example of Production function Production function defines the maximum chairs (QChairs), which can be
produced with the given capital and labour inputs

More about Production Function

Production function is not economical in nature as we do not consider the value of inputs and output.

SHORT RUN AND LONG RUN

Short Run

Short run refers to a period in which output can be changed by changing only variable factors. For
example – Short run, some factors are fixed and some are variable and fixed factors cannot be changed
during such a short span of time.

Long Run

Long run refers to a period in which output can be changed by changing all factors of production.

Difference between Short Run and Long Run

Basic Short run Long run

Meaning Short run refers to a period
in which output can be
change by changing only
variable factors
Classification Factors are classified as
variable and fixed factor in
the short run.
Role of Demand In the short run, demand is
more active in price
determination as supply
cannot be increased
immediately with increase in
demand
VARIABLE FACTORS AND FIXED FACTORS
Long run refers to a period in
which output can be
changed by changing all
factors of production
All factors are variable in the
long run.
In the long run, both demand
and supply play equal role in
price determination as both
can be increased.

Variable Factors

Variable Factors refer to those factors, which can be changed in the short run. It must be noted that
variable factors are not required in case of zero output.

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Fixed Factors

Fixed factors refer to those factors, which cannot be changed in the short run.

Types of Production Function

Short Run Production Function (Variable Proportion Type): As there is change in variable input only, the
ratio between different inputs tends to change at different levels of output.

Long Run Production Function (Constant Proportion Type): As all inputs are variable in the long run, the
ratio between different inputs tends to remain the same at different levels of output.

CONCEPT OF PRODUCT

Product or output refers to the volume of goods produced by a firm or an industry during a specified
period of time.

Total Product (TP)

Total product refers to total quantity of good produced by a firm during a given period of time with given
number of inputs.

Total Product is also known as ‘Total Physical Product (TPP)’ or ‘Total Output’. TP is summation MP

TP = ∑ 𝑀𝑃

Average Product (AP)

Average product refers to output per unit of variable input.

𝑇𝑃
Average Product is also known as ‘Average Physical Product (APP)’ AP = 𝑄

Marginal Product (MP)

Marginal product refers to addition to total product, when one more unit of variable factor is employed.

Marginal Product (MP) is also known as ‘Marginal physical product (MPP)’ MP = TPn – TP n – 1
∆𝑇𝑃
OR MP = ∆𝑄

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 ∆𝑇𝑃

𝑀𝑈 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠
= ∆𝑄

RELATIONSHIP BETWEEN TP & MP

● MP falls but positive, TP increases.

● MP = 0 , TP Maximum.
● MP becomes negative, TP falls.

● TP = ∑ 𝑀𝑃

RELATIONSHIP BETWEEN AP & MP

● MP > AP , AP rises.
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 ● MP = AP , AP is Max. & constant.
● MP < AP , AP falls.
● both AP and MP are derived from TP

LAW OF DIMINISHING RETURNS

Law of diminishing returns states that when more and more units of a variable factor are
employed with a fixed factor, then marginal product of the variable factor must fall

RETURNS TO A FACTOR: LAW OF VARIABLE PROPORTIONS

Returns to a factor refers to the resultant increase in the total product (return) when only one factor is
increased, keeping all other factors fixed.

Statement of Law Variable Proportions

Law of Variable Proportions (LVP) states that as we increase quantity of only one input keeping other
inputs fixed, total product (TP) initially increased at an increasing rate, then at a decreasing rate and
finally at a negative rate.
Assumptions of Law of Variable Proportions:
1. It operates in short run.3 ly.45 6

Fixed Factor Variable Factor TP (Units) MP (Units) Phase

(Land in acres) (Labour)
1 1 10 10 1st (Increasing returns to a factor)
1 2 30 20
1 3 60 30
1 4 80 20 2nd (Diminishing returns to a factor)
1 5 90 10
1 6 90 0
1 7 80 -10 3rd (Negative returns to a factor)
Factor ratio keeps on changing: It must be noted that production is carried out under conditions of
‘Variable Proportions’, i.e. proportion between fixed and variable factor changes with every additional
variable factor. In Table 5.1 , the ratio between land and labour changes from 1:1 to 1:2, then to 1:3 and
so on, with addition of more and more units of labour.

Phase 1: Increasing Returns to a Factor:

In the first phase, every additional variable factor adds more and more to the total output. It means TP
increases at an increasing rate and MP of each variable factor rises. Reasons :  Phase 2: Diminishing
Returns to a Factor:

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In the second phase, every additional variable factor adds lesser and lesser amount of output. It means TP
increases at a diminishing rate and MP falls with increase in variable factor. Reasons : .
Phase 3: Negative Returns to a Factor:
In the third phase, the employment of additional variable factor causes TP to decline. MP now becomes
negative. Reason : ,, .
Phase of Operation:
So.

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