PRODUCTION ANALYSIS

What do you mean by production? Or explain the concept production.

Production means creation of goods and services for the human consumption. Satisfaction of human
wants is the objective of production. Production is the process by which the inputs (factors) are converted into
output (economic goods).

According to J.R. Hicks,” production means any activity directed to the satisfaction of other people’s
wants through exchange”.

Thus production means creation of form utility, place utility and time utility. Production may take place
in three manners.

Form utility:

Form utility is generally created by changing the physical shape or the size of existing goods. For e.g.,
conversion of wood into furniture’s.

Place utility:

Place utility is created by transporting the goods from the place of plenty to the place of economic need
or use. For e.g., gold, coal, petrol etc.

Time utility:

Time utility is created by storing goods till they are required. For e.g., storage of grains.

What do you mean by Production function? Or Explain production function.

Production function has immense utility to the managers and executives in decision making. A
Production function explains the functional relationship between factors of production (physical inputs and the
quantity of goods produced physical output). In other words,” production function specifies a flow of output
resulting from a flow of inputs during a specified period of time”.

Algebraically, the production function can be expressed in equation in which the inputs are independent
and output is dependent variables. The common equation denoting a simple production function is the
following.

Q= f (L, N, K)
Where,

Q = represents the physical quantity of output

F = denotes functional relationship

L = represents land

N = shows the labour unit and

K = denotes the capital employed.

Write a note on short and long run production function?

Short run is the time period over which some inputs or factors of production are fixed and some are
variable. Generally in the short period plant, machinery, equipment, land and building, furniture, manager or
the administrative staff are the fixed factors. So in the short run the size of firm or plant remaining unchanged,
the output is produced by changing the variable factors. Hence the short run offers a limited set of choices to
the firm due to the inelasticity of fixed factors.

The short run production function can be shown as follows algebraically,

Q = f (a / b, c,……n, t)

Where,

Q refers to the output and f to the functional relationship. The oblique (/) divides the fixity of factors, so
a, b, c,…n are the fixed factors and t, which refers to technology, is also fixed.

Long run production function:

Long run is a time period which allows for all types of changes in the inputs so in the long run all inputs
or factors are variable and nothing is fixed. Though the scale of production is variable in the long run, the basic
technology is assumed to be constant. Hence, long run production function is algebraically express as follows,

Q = f (a, b, c, n, t)

Where,
 Q refers to output and f to functional relationship. Inputs are denoted by letters a, b, c, d, n, t is the state
of technology which is assumed to be constant.

LAW OF VARIABLE PROPORTION

The law of variable proportion if one of that basic laws of production. It examines the relationship
between one variable factor and output, assuming all the other factors to be fixed. It explains how the variation
of the factors of production affects the total and marginal returns (output). This law is also called the law of
proportionality.

The law of states that when more and more of the variable factor are used, keeping the fixed factors
constant, a point is reached beyond which the marginal product, then the average and finally the total product
will diminish.

Prof. Benham has defines the law in these words, “as the proportion of one factor in a combination of
factors is increased, after a point, first the marginal and then the average product of that particular factor will
diminish”.

Assumptions:

� There is no change in the level of technology.

� While one variable is changing, the other variables are not changing.

� All the units of a variable are homogeneous.

� The law is applicable only in the short run as all factors are variable in the long run.

� The proportions of the factors can be changed.

� The product is measured in physical units.

The law is illustrated in the following table.

 Variable Total product in Average product Marginal Return
factor labour units in units product in units

1 10 10 10

2 22 11 12 Incr. Ret.

3 36 12 14

4 48 12 12

5 55 11 7 Dimn. ret

6 60 10 5

7 60 8.6 0

8 56 7 -4 Neg. demn. Ret.

 A close observation of the table shows that,

In stage one – the total, average and marginal product increases. The total product increases at an
increasing rate, which represents increasing returns.

In stage two – the total product increases but at a diminishing rate. The average and marginal product
are diminishing. But marginal products diminishes more than average product. This stage represents
diminishing returns.

In stage three – the total and average products decline and the marginal product is zero and negative. It
is a negative stage for marginal product.

In the figure, TU is the total product curve. MP is the marginal product curve and AP is the average
product curve. The total product curve increases at an increasing rate up to the point A, then increases at a
diminishing rate up to B, reaches maximum at the point C and after declines. The AP increases up to the point
E and later declines. The MP curve increases and later diminishes and become zero at the point F.

Causes for increasing returns:

 Following reasons can be given for increasing returns.

Indivisibility of inputs or factors:

The machines, equipments, tools and similar other factors used in the process of production are
indivisible. Their costs will be shared between more and more units of the product as output is increased with
the specified range. Intensive usage of such factors increases the returns and decreases the cost. Indivisibility
of factors thus ultimately leads to technical economies of production.

Specialization:

Large scale production is characterized by division of labour, which leads to specialization.

Specialization saves time and decreases the cost of production. Specialization of men and machine is
responsible for increasing returns.

Internal and external economies:

Internal economies are the economic advantages reaped by a firm after its internal expansion or re
organization. Internal economies decrease the cost of production and increase the returns.

External economies are the benefit reaped by each firm when the industry expands. External economies
increase the returns by decreasing the cost of production.

Causes for decreasing returns:

Diseconomies:

When the fixed factors reach the point of optimum utilization the increase in variable factor will result in
diminishing returns. Diseconomies creep in when the existing machinery is overstrained and the firm
management becomes unwieldy. Diseconomies increase the cost of production and lead to diminishing returns.

Lack of perfect substitutes:

Imperfect substitutability of factors of production is another reason for the diminishing returns.
Substitution of factors is beneficial only up to a point. The fixed factor cannot be compensated once that point
is reached as the factors are imperfect substitutes. Hence diminishing returns are inevitable.

LAW OF RETURNS TO SCALE:

 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. In the long run, output can be

increased by increasing all factors in the same proportion.

By returns to scale is meant the behavior of production when all productive factors are increased or

decreased simultaneously in the same ratio. In other words, it explains how the variation of all the factors of

production in a scale affects the output of the product.

The returns to scale may be either equal or more than equal or less than equal in proportion.
Accordingly we get three stages.

● If the increase of all the factors leads to more than proportionate increase in output, returns to scale are
said to be increasing.
● But if the increase of all the factors leads to the proportionate increase in output, returns to scale are said

to be constant.

● On the other hand, if the increase of all factors results in less than proportionate increase in output, the

return to scale are said to be diminishing.

SCALE TOTAL MARGINAL RETURNS

PRODUCT PRDOUCT
S.NO
IN BAGS IN BAGS
.

1. 1W+2L 20 20
2. 2W+4L 50 30 INCR. RETURNS
3. 3W+6L 90 40

4. 4W+8L 130 40 CONS. RETURNS

5. 5W+10L 170 40

6. 6W+12L 200 30
7. 7W+14L 220 20
 8. 8W+16L 230 10 DECR. RETURNS

The table reveals that;

In the stage I, the total product increases more than proportionately. The marginal product therefore
increases showing increasing returns.

In the stage II, marginal product in constant and

In the stage III the marginal product is diminishing showing diminishing returns.

In the figure, returns to scale increases from A to B, remain constant from B to C and diminishes from C
to D.

Causes for increasing return in the first stage:

● Division of labour or specialization results in large scale production in less time. Specialization leads to

invention sand innovations and ultimately result in increased production.

● Indivisibility of machines and equipment is another reason for increasing production. So there is more

intensive usage of machines and equipments, resulting in increased output.

 ● External economies such as the economies of concentration, economies of information increased the

production.
Causes for constant return:

● This situation arises when after reaching a certain level of production, economies of scale are balanced

by diseconomies of scale.
Causes for decreasing return:

● Diminishing returns are due to internal and external diseconomies. Technical diseconomies are largely

responsible for diminishing returns.

● Besides, the problem of morale and motivation of both management and labour force also subscribe to

diminishing returns. So management, when becomes a problem, return decrease.