THEORY OF PRODUCTION

Production:-

 Production may be defined as a process through which a firm transforms inputs into
output.
 It is the process of creating goods and services with the help of factors of production or
inputs for satisfaction of human wants.
 In other words, ‘transformation of inputs into output’ whereby value is added, is broadly
called production.
 example, in the production of wheat, the use of land, seed, fertilizer water, pesticides,
tractors, labor etc. are inputs and wheat is output. The relationship between inputs and
output of a commodity depends upon the state of technology because with the help of
advanced technology more can be produced with the help of same inputs or same
output can be produced with the help of less input.

Production

Form Utility Place Utility Time Utility

Changing the Form of Natural Resources
i.e. converting the Raw Material into
items Possessing Utility.
For Example, Changing the form of a Log
of Wood into a Table or changing the
form of Iron into a Machine.
Changing the Place of Resources from
the Place where they are of little or no
use to another place where they are of
Greater use.
For Example, Removal of Coal , Gold
etc from Mines & Supplying them to
Markets.
Apples in Kashmir Orchards
Making Available Materials at times
when they are not normally available.
For Example, Harvested Food Grains
are Stored for use till next Harvest.
Canning of Seasonal Fruits is
undertaken to make them available
during off Season.
Factors of Productions
Land

Rawmaterials Labour
Factors of productions

Capital

Q=f (K, M, L,)

Q = Output or Production
K =Capital
M = Raw-materials
Short
L = Land run and
and Labour long
Fixed factors and variable
run
Production Function factors
Short run refers to a time Fixed factors are those
period in which a firm factors of production
does not have sufficient whose quantity can not be
time to increase the scale hanged with change in the
of output. level of output
It can increase only the For example, the quantity
level output by increasing of land, machinery etc. can
the quantity of a variable not be changed during
factor and making short run.
intensive use of the Variable factors are those
existing fixed factors. factors of production
Long run refers to the whose quantity can easily
time period in which the be hanged with change in
firms can increase the the level of output. 
scale of output by For example, we can easily
increasing the quantity of change the quantity of
all the factor inputs labor to increase or
simultaneously and in the decrease the production.
Basic Concept and Three measures of Production

Total product or TPP is the total amount of a commodity that is produced with a given level of factor
inputs and technology during a given period of time. For example, 2 units of labour
Total physical combined with 2 units of capital can produce 26 fans per day. Here 26 fans is the total
product (TPP) physical product which is produced with the given level of inputs (labour and Capital)

Average Product (AP) APP is the output produced per unit of input employed. It can be obtained by dividing
TPP by the number of units of variable input. So APP = TPP/L where L is the units of
or Average physical labour. For example, if 10 workers make 30 chairs per day, the APP of a worker per
product (APP) day will be 30 ÷ 10 = 3 chairs. If the productivity of a factor increases, it implies that
the output per unit of input has increased.

Marginal Product MPP of an input is the additional output that can be produced by employing one
more unit of that input while keeping other inputs constant. For example, if ten
(MP) or Marginal tailors can make 50 shirts per day and 11 tailors can make 54 shirts per day, the
physical product marginal product of 11 workers will be 54 - 50 = 4 shirts per day.
(MPP)

Formula
𝑇𝑃𝑃 = ∑𝑀𝑃𝑃
𝑇𝑃𝑃 = (𝑀𝑃𝑃1 + 𝑀𝑃𝑃2 + 𝑀𝑝𝑝3 + ⋯𝑀𝑃𝑃n)
𝐴𝑃𝑃 = 𝑇𝑃𝑃/L

Relationship
L = no. of Variable Unit
between TPP
and𝑀𝑃𝑃
MPP= ∆𝑇𝑃𝑃/∆L
As long as MPP
increases, TPP Relationship between
increases at an APP and MPP
increasing rate. As long as MPP is
greater than APP, APP
When MPP falls increases.
but remains When MPP is equal to
positive,TPP APP, APP is maximum
increases but at and constant.
When MPP is less then
a diminishing APP, APP decreases.
rate. MPP can be zero and
When MPP negative but APP is
never zero or negative.
becomes zero,
TPP is maximum.
Law of Production

 The production laws describe the technically possible ways to increase the level of
production. Production can be increased in various ways.
 Production can be increased by changing all means of production. This is only possible in
the long term. Thus, the Law of Return to Scale refers to the long-term analysis of
production.
 In the short run, the output can be increased by using more variable factors, while
holding capital (and possibly other factors as well) constant.

Law of variable proportions/Law of Reurn to a Factor

Increase Return to a factor

Diminishing Reurn to a Factor

Negetive Reurn to a Factor

Law of variable proportions/Law of Return to a Factor:-

 The law of variable proportions is a short period production law. It is also called returns
to a factor.
 Let us first understand the meaning of variable proportions. In a production process
when only one factor is varied and all other factors remain constant, as more and more
units of variable factor are employed, the proportion between fixed and variable factors
goes on changing.
 So it is termed as the law of variable proportions. This law states that if you go on using
more and more units of variable factor (labour) with fixed factor (capital), the total
output initially increases at an increasing rate but beyond a certain point, it increases at a
diminishing rate and finally it falls.
  This law was initially called the law of diminishing returns Marshall who applied the law
only in agriculture sector but modern economist called it the law of variable proportion
and proposed its applicability to all the sectors of the economy.

Assumption of the law

(i) The firm operates in the short run.

(ii) There is no change in technology of production.
(iii) The production process allows the different factor ratios to produce different levels
out output.
(iv) All the units of variable factor are equally efficient.
(v) Full substitutability of factors of production is not possible.

In the above table:-

 Land is considered as fixed factor and labour is variable factor of production.
 As the labour are increased keeping land fixed, TP first increases that the increasing rate
up to the 3rd unit of labour and increases at a diminishing rate up to the 5th unit of
labour. TP is maximum at the 5th unit of labour and becomes stable up to the 6th units
of labour and starts to fall.
 MP first increases, becomes maximum at the 3rd unit of labour and thereafter declines.
 MP is zero at 6th units of labour and thereafter negative.
 AP also increases at first, becomes maximum at the 3rd unit of labour and stable upto
4th unit of labour, and thereafter declines.
 AP and MP are equal at the 4th unit of labour.
 Though AP declines it never becomes zero.
 Stage-I: Increasing Returns to a factor in this phase TPP increases at an
increasing rate and marginal product of variable factor, labour increases. In
the end of this phase MPP is maximum. So, this is the phase of increasing
returns to a factor.
 Stage-II: Diminishing Returns to a factor In this phase TPP increases but at a
diminishing rate MPP declines but remains positive. At the end of this phase
MPP is zero. At this point TPP is maximums. So, this is the phase of
diminishing returns to a factor.
 Stage-III: Negative Returns to a factor In this phase, MPP declines and it
becomes negative. Here the TPP also starts falling. It operates from the level
of output where MPP of labour is zero but subsequently becomes negative.
The table 17.2 given below illustrates the three phases of the law of variable
proportions.

Returns to Scale
 Returns to scale are a term in economics that refers to a rate at which a
change in output leads to a change in input. It is a long-run theory of
production.
 In the long run all factors of production are variable. No factor is fixed.
Accordingly, the scale of production can be changed by changing the
quantity of all factors of production.
Iso-Quant Curve
Meanings:-
The term Iso-quant or Iso-product is composed of two words, Iso = equal,
quant = quantity or product = output.
 Thus it means equal quantity or equal product. Different factors are needed
to produce a good. These factors may be substituted for one another.
 A given quantity of output may be produced with different combinations of
factors. Iso-quant curves are also known as Equal-product or Iso-product or
Production Indifference curves. Since it is an extension of Indifference curve
analysis from the theory of consumption to the theory of production.
Definitions:
According to Peterson “An Iso-quant curve may be defined as a curve showing
the possible combinations of two variable factors that can be used to produce
the same total product.”

Assumptions:
1. Two Factors of Production
2. Divisible Factor
3. Constant Technique
4. Possibility of Technical Substitution
5. Efficient Combinations

1. 1 units of labour and 15 units of capital

2. 2 units of labour and 11 units of capital
3. 3 units of labour and 8 units of capital
4. 4 units of labour and 6 units of capital
5. 5 units of labour and 5 units of capital