Theory of Production

Swapan Chakraborty
Production function

• A production function exhibits the algebraic

relationship between output and factors of
production given by the technology
Production function with two factors

• Sometime a production function is represented as the

relationship between output and factors, mainly
capital and labour;
Q = F( K ; L)
• Short-Run : When at least one of the factors is fixed
and rest are variable ; in two-inputs model capital is
assumed to be fixed in the short-run; labour is
variable.
• Long-Run: All the factors of production are
variable.
Short-run Production function

• Assuming labour to be variable factor and capital as

fixed factor;

• Marginal product of labour: Change in output due

to the change in the amount of labour employed;

• Average product of labour: Output produced

per-unit of labour; reflects labour productivity;
Short-run Production function

• Law of diminishing returns: as additional units of a

variable input are combined with a fixed input, after
some point the additional output (i.e., marginal
product) starts to diminish.

• In our short-run two factors production function, law

of diminishing return to the variable factor implies; as
more and more labour are employed over fixed stock
of capital; the additional output generated by extra
labour will start falling or marginal productivity of
labour starts declining.
Short-run Production function: Numerical
Example
Short-run Production function: Graphical
exposition
Short-run production: Three stages of
production
• Three stages of production:
• Stage I: When total product starting from zero
reaches to a point where the Average product is
maximum; such that AP =MP
• Stage II: When Average product started declining till
the point where marginal product is zero ;
• Stage III: When marginal product is zero and
thereafter;
Short-run production: Three stages of
production
Short-run production: Three stages of
production
• In which stage should a profit maximizing(rational)
firm operate?
Any rational producer avoids the first as well as third stages of production. Therefore,
producers prefer Stage II – the stage of diminishing returns. This stage is the most relevant
stage of operation for a producer according to the law of variable proportions.
Long Run production function

• Assuming a production function of the form;

When both capital and labour are variable.

Characteristics:
1. Marginal productivity of capital and labour are
positive.
2. Diminishing returns operate for both the factors.
Long Run production function: Iso-quandts

Definition: An Iso-quandt represents the locus of different

points in the (K,L) plane such that total quantity of output
produced along the curve remain same
Long-run production function: Returns to scale

• Returns to scale can also be described using the

following equation

hQ = f(kX, kY)

if h > k then IRTS or IRS

if h = k then CRTS or CRS
if h < k then DRTS or DRS