COMPETENT COMMERCE

CLASSES
By:-Rohit Maheshwari

CLASS-XI
SESSION-2023-24

ECONOMICS
By-Anubhav Awasthi
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TOPIC- 6
PRODUCTION
FUNCTION

Student Name :-________________________

School:-______________________________
-Production :- It refers to transformation of inputs into output.
-Production Function :- It is an expression of the technological relation between
physical inputs and output of a good.
Qx=f(L,K)
-Short Run :- It refers to a period in which output can be changed by changing
only variable factors .
-Factors are classified as variable and fixed factor in the short run.
-Long Run :- It refers to a period in which output can be changed by changing
all factors of production .
-All factors are variable in the long run.

-Variable & Fixed Factors :-

1-Variable factor :- It refers to those factors , which can be changed in the short
run. They vary directly with output. Ex:- Raw material , labour etc.
2-Fixed factor :- It refers to those factors, which cannot be changed in the short
run. They do not vary directly with output. Ex:- Building rent, permanent staff
etc.

-Concept of Product :-
Product or output refers to the volume of goods produced by affirm or an
industry during a specified period of time .
The product concept can be seen from three different perspectives:
1. Total Product
2. Marginal Product
3. Average Product

1. Total Product (TP):

Total Product refers to the total quantity of goods produced by a firm during a
given period of time with a given number of units.
TP = AP x Q
2.Average Product (AP):
It refers to output per unit of variable input. AP is zero , when TP is zero but it
cannot be negative because TP can never be negative .
AP = TP / Q
3.Marginal Product (MP):
It refers to addition to total product , when one more unit of variable factor is
employed . MP= TPn – TPN-1
#Relationships between Products:-
Fixed Factor Variable TP MP AP
Factor
1 1 10 10 10
1 2 30 20 15
1 3 45 15 15
1 4 52 7 13
1 5 52 0 10.4
1 6 48 -4 8
RELATIONSHIP BETWEEN TP & MP

• When MP increases ,then TP

increases at an increasing rate.
• When MP starts declining but
remains positive ,then TP increases at a
diminishing rate.
• When MP is zero, then TP is
maximum.
• When MP is negative, Then TP
decreases.

RELATIONSHIP BETWEEN AP & MP

• when MP>AP , AP increases.

• when MP = AP ,AP is constant and at its
maximum point .
• when MP<AP , AP falls.
• MP becomes negative, and AP remains
positive.
 LAW OF VARIABLE PROPORTION

Statement :-The Law of Variable Proportions states that as we increase the

quantity of only one input while keeping other inputs fixed, the total product
increases initially at an increasing rate, then at a decreasing rate, and finally at a
negative rate.

It is also known as ‘Law of Returns to factor.

Assumptions to the Law :-
1-Technique of production does not change.
2-All units of variable factor are equally efficient.
3-Factors of production are not perfect substitutes of each other.
4-There must be inputs whose quantity is kept fixed. Because of this, the ratio
between the fixed and variable factor changes. Hence the name ‘Variable
Proportion’ exist.
As per the law of variable proportions, the changes in TP and MP can be
categorised into three phases:
Phase 1: Increasing returns to a factor.
Phase 2: decreasing returns to a factor.
Phase 3: Negative returns to a factor.

Phase I: Increasing Returns to a Factor (TP increases at an increasing rate):

In the initial stage, each additional variable component raises the total production
by an increasing amount. This indicates that each variable’s MP rises and that TP
rises at an increasing rate.
• It occurs as a result of the initial variable input quantity being too small
in comparison to the fixed input. Due to the division of labour, efficient
use of the fixed input during manufacturing increases the productivity of
the variable input.

Note:- Point of Inflexion: A point from where the slope of TP curve changes is
known as point of inflexion. Till the point of inflexion, TP increases at an
increasing rate, and from this point downwards, it increases at a diminishing
rate.
- Causes or Reasons for Increasing returns:
1- Better utilisation of fixed factor :- In the initial stages, fixed factor remains
underutilized as the supply of the fixed factor is too large , whereas variable
factors are too few. When variable factors are increased and combined with
fixed factor, then fixed factor is better utilised and output increases at increasing
rate.
2- Increased efficiency of variable factor:- Additional application of the
variable factor causes process based division of labour that raises efficiency of
the factor due to specialisation .
3-Improved coordination between fixed and variable factors:- Fixed factors
was idle from a very long time . On adding variable factor on the fixed factor
leads to improve in there coordination and causes increasing returns.

Phase II: Decreasing Returns to a Factor (TP increases at an decreasing rate):

Every extra variable in the second phase increases the output by a less and
smaller amount. This indicates that when the variable factor increases, MP
decreases, and TP rises at a decreasing rate. This stage is known as the
diminishing returns to a factor.

• This occurs as a result of pressure on fixed inputs that results in a decline

in variable input productivity after a certain level of output.
• The second phase is highly important because a rational producer
will always try to produce during this time because MP and TP are
both positive for each variable factor.

- Causes or Reasons for Decreasing returns:

1. Optimum Combination of Factors: There is only one optimal combination
between a variable and a fixed factor where the overall product is maximum.
The marginal return of the variable factor begins to decrease after the fixed
factor has been utilised to its fullest potential. For instance, if a machine (fixed
factor) is being used to its full potential with 4 workers, adding a fifth worker
will only slightly improve TP, and MP will begin to decline.
2. Over-utilization of Resources: The fixed component finally reaches its limits
and begins to produce diminishing returns as one continues increasing the
variable factor.
3. Imperfect Substitutes: Fixed and variable factors are imperfect substitutes for
one another, which results in diminishing returns to a factor. There is an extent to
which one factor of production can be substituted for another. For instance, until
a certain point, capital may be used in place of labour or labour may be used in
place of capital. Beyond a certain point, they start to lag behind each other and
produce declining returns.

Phase III: Negative Returns to a Factor (TP Falls):

The third phase shows a decline in TP due to the use of more variable factors.
MP has now become negative. As a result, this stage is referred to as negative
returns to a factor.

• It occurs when the amount of variable input exceeds the fixed input by a
great difference, which causes TP to decrease.
• In the third phase, MP for each variable factor is negative. Therefore, no
company would deliberately decide to operate at this phase.

- Causes or Reasons for Negative returns:

1. Limitation of Fixed Factor: The reason why some production factors have
negative returns is that they are fixed in nature and cannot be raised in the short
run together with an increase in the variable factor.
2. Lack of Coordination: When the variable factor dominates the fixed factor,
they interfere with one another. It causes a lack of coordination between the
fixed and the variable factor. As a result, total output falls rather than rises, and
the marginal product becomes negative.
3. Decrease in Efficiency of Variable Factor: The benefits of specialisation and
the division of labour begin to diminish as variable factors continue to increase.
It causes inefficiencies of variable factors, which is another element that finally
leads to negative returns.

Thank You

Space for Additional Notes :-

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