Concept of Production Function

In an economy, consumers and producers are needed for smooth functioning. A

producer makes use of various inputs for the production of goods and services.
Production is an important activity as it enhances the product’s utility by changing
total satisfaction or value that you get from consuming a particular product or service
it into the form needed by the consumers.

Production refers to the transformation of inputs into outputs.

The production function:

The production function is an expression of the technological relationship

between the physical inputs and outputs of a good.

A production function can be an equation, table, or graph showing a maximum

amount of a commodity that a firm can produce from a given set of inputs during
a period.

The concept of production function describes how a firm uses its factors of
production and combines them to produce different output levels.

It shows the minimum set of inputs required to produce a given level of output,
or it shows the maximum level of output that can be produced with the given level
of inputs. Production function can be symbolically written as,

OX = f (i1, i2, i3 …….in)

Where,

OX = Output of commodity X
f = Functional relation
i1, i2, i3 …….in = Inputs needed for OX

Suppose a firm manufactures chairs using two inputs -labour and capital. The
production function can be written as,

OChairs = f(L,K)

The concept of production function it can be defined as the maximum number of

chairs that can be produced with the given labour and capital. If the production
function is given as 250 = (7L,2K), seven units of labour and two units of capital
can produce a maximum of 250 chairs.
 Production function establishes a technical relationship between inputs and
outputs. The production function only includes technically efficient production
methods, and no rational consumer will use inefficient methods( Economic
method).
  The two types of factors of production – variable factors and fixed factors.

 Variable Factors – Variable factors refer to those factors which can be

changed in the short run. They vary directly with the level of output. As
output increases, the requirement for variable factors also rises and vice
versa. Variable factors are not required in case of zero output. For
example, raw materials, casual labor, power, fuel, etc.

 Fixed Factors – Fixed factors refer to those that cannot be changed in the
short run. The number of fixed factors remains the same in the short run,
irrespective of the output level. They do not change whether the level of
output rises, falls, or becomes zero. For example, plant and machinery,
buildings, land, etc.

Short Run Production Function: Short run refers to a period in

which output can be changed by changing only variable factors. In the
short run, fixed factors like a plant, machinery, building, etc., cannot be
changed. Therefore production can be raised only by increasing variable
factors until the extent of the capacity of the fixed factors.

For example, if a producer wants to increase output in the short run, he can do
so by using more raw materials or increasing the number of workers with the
existing factory building, plant, and equipment. One cannot immediately expand
the factory building, additional plant, and equipment. So, in the short run, some
factors are fixed, and some are variable and fixed factors cannot be changed
during such a short period.

Long Run Production Function:

The long run refers to a time in which output can be changed by changing
all factors of production. In the long run, there are no fixed factors, as all
factors can be varied. In the long run, it is enough for the firm to adjust all its
inputs according to changes in the conditions. In the long run, a firm can change
its factory size, switch to new production techniques, purchase new machinery,
etc. All factors are variable in the long run.

Therefore, if a producer wants to increase his output in the long run, he can do
so by changing any of the factors of production, including factory building, plant
machinery, etc

 The long-run production function studies the effect on output due to

changes in all the factors inputs. As all inputs are variable in the long run,
the ratio between different inputs tends to remain the same at different
output levels.

Total Product, Marginal Product, Average Products

The concept of product can be considered from three different angles – Total
Product, Marginal Product, and Average Product.

Total Product : Total Product (TP) refers to the total quantity of goods
produced by a firm during a given period of time with the given number of
inputs. For example, if ten labourers produce 60 kg of rice, the TP is 60 kg.

In the short run, a firm can expand TP by increasing only the variable factors.
However, in the long run, TP can be raised by increasing both fixed and variable
factors. TP is also known as ‘Total Physical Product (TPP),’ ‘Total Return,’ or
‘Total Output’.

Marginal Product (MP):

Marginal Product (MP) refers to the addition to TP when one more unit variable
factor is employed. MP can be written as,

MPn = TPn – TPn-1

Where,
MPn = MP of nth unit of a variable factor
TPn = TP of n units of variable factor
TPn-1 = TP of (n-1) units of variable factor
n = number of units of variable factor

For example, if ten labourers make 60 kg of rice and 11 labourers make 67

kg of rice, then the MP of the 11th labourer will be

MP11 = TP11 – TP10

MP11 = 67-60 = 7 kg

We now know that MP is the change in TP when one more unit of a variable
factor is employed.

 However, when a change in variable factor is greater than one unit,

then MP can be calculated as,

MP = Change in TP/ Change in units of Variable Factor

MP = ΔTP/Δn

Suppose two laborers produce 60 units, and five laborers produce 90 units;
then MP will be,

MP = 90-60/5-2 = 30/3 = 10 units

Average Product (AP):

Average product (AP) refers to output per unit variable input.

For example, if TP is 60 kg of rice produced by ten labourers (variable input),

then AP will be 60/10 = 6 kg.

AP is obtained by dividing TP by the number of units of variable inputs. AP can

be written as,

AP = TP/Units of variable factor (n)

 Law of Variable Proportion
As there is a change in variable input only, the ratio between different
inputs tends to change at different output levels. The law of Variable
proportions explains this relationship. Before we move on to the law of
variable proportions, let us look at what is meant by returns to a factor.

Returns to a Factor: Returns to a factor refer to the resultant increase in the

total product (return) when only one factor is increased, keeping all other
factors fixed. In the short run, when one input is variable, and all other inputs
are fixed, the firm’s production function exhibits the law of variable proportions.

The law of variable proportions is one of the most important laws of production. It
shows the nature of the rate of change in output due to a change in only one
variable factor of production.

Statement of Law of variable Proportions

Statement of Law of Variable Proportions states that as we increase the
quantity of only one input while keeping other inputs fixed, total product
(TP) increases at an increasing rate, then at a decreasing rate, and finally at
a negative rate.

According to the Law of Variable Proportions, the changes and behavior of TP

and MP can be classified into three phases. Let us understand each phase with
the help of a diagram.
Phase I – Increasing Returns to Factor
In the first phase, every additional unit of variable factor adds more and more to
the total product. TP increases at an increasing rate, and the MP of each variable
factor rises. As seen in the diagram, TP increases at an increasing rate till point
A, and MP rises till it reaches point B. This is because, in this phase, the fixed
factors are too large, and the variable factors are few. Therefore adding more
and more units of variable factors leads to better utilization of the fixed factors,
and thus TP increases at an increasing rate.
Phase II – Diminishing Returns to a Factor under Law of
variable proportions
In the next phase, every additional unit of variable factor contributes lesser and
lesser to the total output. TP increases at a diminishing rate, and the MP of each
variable factor decreases. In the diagram, TP rises till it is maximum at point M
and MP decreases till it is zero at point S. When TP is maximum, MP is zero.

Diminishing returns occur in this phase because the optimum use of fixed factors
has already been made, after which the marginal return of the variable
diminishes. Another contributing reason is that fixed and variable factors are
imperfect substitutes for one another.

Phase III – Negative Returns to a Factor

In the third phase, the additional units of variable factor cause the TP to decline,
and MP becomes negative. Thus, this phase is known as negative returns to a
factor. The third phase starts after point M on the TP curve and point S on the
MP curve. In this phase MP of each variable factor is negative. This is because
of the limitation of fixed factors, poor coordination between variable and fixed
factors, and a decrease in the efficiency of the variable factor

Assumptions of the Law :

1. It operates in the short run, as factors are classified as variable and fixed.
2. The law applies to all fixed factors, including land.
3. Different units of different variable factors can be combined with fixed
factors.
4. This law applies to the field of production only.
5. The effect of change in output due to change in variable factors can be
easily pinpointed.
6. Factors of production are imperfect substitutes of each other beyond a
certain limit.
7. The level of technology is constant.

Phase Operation
Law of variable proportion explains that a rational producer will always prefer to
operate in the second phase of the law of variable proportions. In Phase I,
every additional unit of variable factor gives an increasing amount of output. This
means that more profits can be made, and the producer increases production
with more units of the variable factor.

In the third phase of the law of variable proportions, the marginal product of
additional units of variable factors is negative, and the total product is declining.
This means that the producer will lose profits. Therefore, no rational consumer
will choose to operate in this phase. This concludes that produce will aim to
operate in the second phase as TP is maximum and MP is positive.
Relationship between Total Product and Marginal Product
 The relationship between TP and MP is explained through the Law of
Variable Proportions. As long as the TP increases at an increasing rate,
the MP also increases. This goes on till MP reaches maximum.
  When TP increases at a diminishing rate, MP declines. This continues till
the point where TP is at its highest.
 When TP reaches its maximum point, MP becomes zero. This concept can
be better understood with the help of the following schedule and diagram.
diagram

As you can see in the graph, TP increases at an increasing rate till point P, the
point of inflexion, and till that point (i.e., the 2nd unit of variable factor), MP
increases. Then, as the TP increases at a diminishing rate till point M, when TP
is maximum.,
m., the MP keeps declining and reaches zero at point N. This happens
at the 6th unit of the variable factor. After this point, the TP starts decreasing, and
MP becomes negative, which can be seen when the 7th unit of a variable factor
is employed.

Relationship
ship between Marginal Product and Average Product
 The marginal product (MP) and average product (AP) initially increase and
then decrease due to the operation of the Law of Diminishing Marginal
Returns. As long as MP is higher than AP, AP increases. At the highest
point of AP, i.e., when AP is at its maximum, MP is equal to AP.
 When MP becomes lesser than AP, AP also starts to fall. After that, both
AP and MP fall, but MP becomes negative, and AP remains positive.
 Also, MP falls at a faster rate as compared to AP. This can be better
understood with the help of the following schedule and diagram
As seen in the above-given
given graph, as long as MP is more than AP, AP rises, i.e.,
till the 2nd unit of the variable factor. When MP and AP become equal at the 3rd
unit, AP is at its highest. When MP becomes less than AP, from the 4th unit of
variable factor, AP falls. After that, both MP and AP fall but the curve of MP is
steeper than that of AP, and AP remains positive while MP becomes negative.