PRODUCTIONFUNCTION: VARIABLE

9 TURNS TO A FACTOR : LAW OF

PROPORTIONS
ne mathematical relation between the bundle of physical inputs used and the physical output of the good
ood
produced from it is termed as Production Function.
RET

9.1 INTRODUCTION
the process of price determination.
We now focus our attention on 'Supply' side of
et us recollect that the main point of interest in
microeconomics is to understand tho
by the interaction of the forcesS
process of determination of The price is determined
price.
relation between price and demand
OT demand and supply. We have already explained the
Us noW understand the relation between price and supply
of that good we mean how
By relation between the price of a good and the supply
much quantity ofa good, a firm or an industry is willing to supply at a price during a
period of time. The price here is "the price at which the industry is willing to supply"
and not the the industry actually gets.
price
What is the immediate motive of a producer? His immediate motive is to at least
recover the total cost incurred on producing a good. So, he will be willing to sell at a
price at which he is able to recover the cost.
Cost depends on the technology used. By technology we mean the proportion in
which different inputs are combined. As such, the cost depends on the combination of
inputs used in producing a good and the prices of these inputs. The relation between
inputs and output is technically, termed as 'production function." This is the subject
matter of this chapter
Production function and the prices of inputs determine cost of producing a good,
which in turn determines supply price of that good. We will study production function
in this chanter followed by study of cost in Chapter 10 and supply in Chapter 11
9.2 PROrUCTION FUNCTION: SHORT RUN AND LONG RUN
9.2.1 Meaning
Production means transforming inputs into output. Output of a good is the result
of inputs used in producing that good. By inputs we mean land, labour, capital,
entrepreneurship, etc.
Production function is an expression which states the mathematical relation
between physical inputs used in production of a good and physical output of that
good. It shows how much quantity of each input is required to produce a given output
of a good. Suppose, the good produced is good X. Then, mathematically, a
production
function is expressed as follows

The above equation reads Iike this : Output of good X (O,) is the function () of n
number of inputs (i, iz» .
9.2.2 The Two Relationships : Short Run and Long Run
Two types of relationships are studied in the study of production function
(1) Short-run production funetion. At what rate the output of a good changes
when only one input is varied and other inputs used in production of tha
 aad are kept fixed. The resulting behaviour of output is termed as returns
to a factor. It is called short run because in the short run, some inputs are
variable while others are fixed.
Long run production function. At what rate the output of a good changes when
all inputs used in production of that good are changed simultaneously and in the
same proportion. The resulting behaviour of output is termed as returns to seale.
It is called long run because in the long run all inputs are variable.
3 RETURNS TOA FACTOR (INPUT)
93.1 Introduction

By 'returns'. here we mean a change physical output of a good. By *returns to

in the
a factor we mean achange in the physical output of a good when only the quantity
of one input (or factor of production) is increased, while that of other inputs kept
constant. In the practical world, labour is generally the variable input and other inputs
like land, capital, etc. are fixed inputs. Let us assume that labour is our variable input
Before we examine the behaviour of output letl us explain the basic concepts uscd.
93.2 Concepts
(TP), Average Product (AP) and Marginal
We use three concepts: Total Product
Product (MP).
the variable
(i) Total product (TP) : TP refers to total output of a good produced by
nput employed.
product (AP) : AP refers to the output produced per unit of variable
(i) Average
1nput. So,
TP
AP=Inits of variable input
iii) Marginal product (MP): MP refers to addition to the TP on account of
employment of one more unit of the variable input. So,
MP TP
n
-

TP, -
Here 'n' stands for the number of units of the variable factor. Suppose n 2, then
-1 1. So, if two units of variable factor produce 28 units of output, while one unit
produces only 10 units, the marginal product (MP,) is 18 units of output, i.e. 28 10
TP, TP)
9.3.3 Numerical Illustrations
Given TP, we can calculate MP and AP. These are shown in the following Table 9.1
TABLE 9.1
TP, MP and AP of a Variable Input
Variable input (units) TP (units) MP (units) AP (units)
10 10 10
2 28 18 14
3 45 17 15
4 52 7 13
5 52 0 10.4
6 48 4 8
 Column 1 records the number of variable inputs employed. Column 2 records TP
produced by these units.
Column 3 shows MP, which equals TP - TP For example, TP of 4 units (i.e.
n
n units) of input is 52. TP of 3 units (i.e. n - 1 units) of inputs is 45. Therefore, MP of

4 units is 7
(= 52 45).-

Column 4 records AP, which equals TP divided by the number of variable inputs.
For example, AP of 4 units of input is 13 (= 52 + 4).
The behaviour of TP (Table 9.1) is based on a law called the Law of Variable
Proportions. The law is explained below.
9.4 THE LAW OF VARIABLE PROPORTIONS
9.4.1 Introduction
In what manner the physical output changes as variable input is increased? The
behaviour of change in output is summed up in the Law of Variable Proportions. This
law is also called the Law of Diminishing Returns or the Law of Eventually Diminishing
Returns.
Box 9.1 Do You Know
French, had given clear analysis of the Law of|
A.R.J. Turgot (1727-81), a a

1766. It is also known as

Diminishing Returns in his economic work as early as now

Law of Variable Proportions.

9.4.2 Statement of the Law
The Law of Variable Proportions* states that as there is increase the quantity
of only one input, keeping other inputs fixed, the total product increases at an
increasing rate in the beginning, then increases at decreasing rate after a level of
output and ultimately falls.
According to the Law, the change in TP and MP are classified into three phases
Phase I :TP increases at increasing rate.
MP increases.
Phas II :TP increases at decreasing rate.
MP decreases and is positive.
Phase III TP falls.
MP becomes negative.
Note that MP diminishes both in phase II and phase III.
However, MP is positive
in phase II while
negative in phase III.
9.4.3 Explanation of the Law
According to the law, there are three phases in the change of TP on account of
increase in the variable input. These are:
Phase I: TP increases at increasing rate : The word 'rate' here signifies MP. So,
in this phase MP increases. What is the explanation for this? In the beginning, the
quantity of the variable input is so small that fixed inputs cannot be effectively utilised.
Let the variable input be workers. As the number of workers increases, each worker is
assigned special1sed task.
a This raises cfficiency of the variable input. As the quantity
of variable mput increases more effective utilisation of fixed inputs takes place. This
also raises the MP of the variable input.
Phase : TP increases at decreasing It means MPstarts falling but remains
rate:

positive, 1.e. greater than zero. With the increase in the quantity of variable input. a
pressure is now being felt on the fixed inputs. The amount of fixed input looks smaller
than actually required to engage the increasing variable input. This reduces MP of the
variable factor, which however remains positive.
Phase II: TP starts falling MP not only continues to fall but also becomes
negative. It is because the quantity of the variable input becomes too big in relation to
the quantity of fixed inputs. This reduces the eficiency of
the variable input so much
that MP becomes negative and TP starts falling.
 lal

04.4 Numerical Example

Let us now take a numerical example to show the three phases.
TABLE 9.2
Returns to a Variable Input
Variable Input (units) TP (units) MP (units) Phase
1 10 10 Phase II
28 18
45 17
4 52 7 Phase II
5 52
6 48 4 Phase III
 TP is maximum
The three phases can be identified by observing
and MP =O
the behaviour of MP (column 3). MP rises up to 2
units of variable input. This is phase I. MP falls but Point of inflexion
(MP is maximum)
remains positive from 3 units of variable input up B
to 5 units. This is phase I. MP becomes negative
from 6th unit. This is the phase III. TP
9.4.5 Graphic Representation
The three phases of the law can be represented
Phase Phase Il Phase ll X
on both TP and MP curves.
Y
On TP Curve
Units of variable Input
The relation between the three phasesand the
shape of TP curve is explained in Appendix. The
three phases of the law, as represented on a TP curve
are as below.
The first phase is up to A, i.e. up to so long Phase Phase l b Phase ll
45 TP curve is convex. The second phase starts O
after A and ends at B, i.e. so long as the curve is Units of variable Input
Concave. The third phase starts after B when TP MP
Curve starts falling. Fig. 9.1: Law of Variable Proportions
On MP Curve
The three phases, as represented on a MP curve are

The first phase is upto a i.e. so long as MP curve is The second

upward sloping.
and
phase
remains above the
starts after a and ends at b, so long as MP is downward sloping
X-axis. The third phase starts after b when MP becomes negative.
 9.5 RELATION BETWEEN TP, MP AND AP

9.5.1 Relation between TP and M1P

J2Y11X
Since MP depends on TP, the relation between the two is

(1) When TP rises at increasing rate, MP rises.

(2) When TP rises at decreasing rate, MP falls but is positive.

(3) When TP falls, MP falls but is negative.
You can verify this relationship from Table 9.1. Also note that when TP is maximum
MP is zero.
Graphically (Figure 9.1), the relation between TP curve and the MP curve is
When TP curve is upward sloping and convex, MP curve is upward sloping
When TP curve is upward sloping and concave, MP curve is downward
sloping but upto the X-axis.
When TP curve is downward sloping, MP curve continues to be downward
sloping but is below the X-axis.
 9.5.2 Relation between MP and AP
This is marginal-average relationship. It is as follows
(1) When MP>AP, AP rises.
(2) When MP =
AP, AP is constant.
(3) When MP < AP, AP falls.
In terms of curve, the is
follows (see Figure 9.2):
relationship as

AP
So long as the MP curve lies above the AP curve, the AP curve
slopes upwards.
O Variable Input (Units)
When MP curve intersects AP curve, it is the highest point of
MP AP curve.
Fig. 9.2: Relation beween AP and MP curves When MP curve lies below the AP curve, the AP curve slopes
downwards.
9.6 NUMERICAL ILLUSTRATIONS
Problem1
Identify the three phases in the law of variable proportions from the following:
Total Product (units) Total Product (units)
5 60
2 50
3 70
4 80
60
solution:
Units of Factor TP MP Phases
20 20 TP increasing at
50 30 an increasing rate

70 20 TP increasing at
80 10 | decreasing rate

60 20 TP falls
blem2

dentif the different output levels which mark the different phases of the operation
he law of variable proportions from the following data:

Units of Variable Input Total Product (Units)

0 0
8
2 20
3 28
4 28
5 20
olution
Variable Input TP MP PhasesS
0 0 0 TP rises at increasing
1 8 8 rate, i.e. MP rises
20 12
28 8 TP rises at decreasing
4 28 0 rate, i.e. MP falls but
remains positive.

20 (-)8 TP falls, i.e., MIP

becomes negative.

Note: The three phases of the law must be identified from the behaviour of MP
only (and not AP).
 POINTS TO REMEMBER
Production function states the relation between inputs and output of a good
Returns to a tactor means change in output of a good when only the quantity of one input is increased,
whiie other inputs are held constant.
TP reters to output of a good produced.
the total
AP equals TP divided by units of the variable input.
MP 1S the addition to total output duet to employment of one more unit of a variable factor
The Law of Variable Proportions states that as we increase the quantity of only one input, keeping other
nputs fixed the TP increases at an increasing rate in the beginning, then increases at a decreasing rate after
an output ievel and ultimately falls.
There are three phases of the behaviour of output in the law: (1) TP increases at increasing rate, i.e.,
MP nses, (2) TP increases at (3) TP falls, i.e., MP
decreasing rate, i.e., MP falls but remains positive and
becomes negative.
The relation between MP and AP is (1) When MP is greater than AP, AP rises: (2)When MP =
AP, AP
iS constant and (3) When MP is less than AP, AP falls.