ECONOMICS DEPARTMENT OF DELHI PUBLIC SCHOOL,

R.K. PURAM

PRODUCER’S BEHAVIOUR
PRODUCTION
 CONTENTS

MEANING OF PRODUCTION FUNCTION - SHORT RUN AND LONG RUN

TOTAL PRODUCT , AVERAGE PRODUCT AND MARGINAL PRODUCT

RETURNS TO A FACTOR
 CONCEPTS
PRODUCTION- Process of transformation of inputs into output is called production.

PRODUCTION FUNCTION- It is the technological relationship between various factors

of production and total output.

It is the technological relationship that tells us about the

maximum output that can be produced from various
combination of inputs. i.e.:
Q = f (q1, q2, q3, -----)

Where: Q–Output q1- Land q2 - Capital q3 - Labour

Lb - Labour
DEFINITIONS
SHORT PERIOD

It is defined as the time period when

one of the factors of production can
be changed with other factors
remaining constant.
DEFINITIONS
LONG PERIOD

It is defined as that period of time when

all factors can be changed in the
production process.
 DIFFERENCE BETWEEN LONG/SHORT PERIOD
Short Period Production Function Long Period Production Function

It is a production function in which factor It is a production function in which factor

ratio tends to change with change in ratio does not change with change in
volume of output. volume of output.

Output is increased by increasing the Output is increased by increasing the

application of only one variable factor. application of all factors.

Scale of output remains constant at all Scale of output tends to change.

levels of output.

Short run production function is studied with Long run production function is studied with
reference to returns to a factor. reference to returns to scale.
DEFINITIONS
FIXED INPUTS

Those inputs which do not

vary (change) with the
level of output in the short run.
DEFINITIONS
VARIABLE INPUTS

Those inputs which vary (change)

with the output in the short run.
DIFFERENCE BETWEEN FIXED/VARIABLE FACTORS
Fixed Factors Variable Factors
They exist only in the short run They exist both in the short and
long run

They do not change with change in They change with change in the
the level of output level of output

They have a positive cost even at Their cost is equal to zero at zero
zero level of output level of output

Plant, machinery, buildings etc are e.g.labour,raw materials etc are

the examples of fixed factors. the examples of variable factors.
DEFINITIONS
Total Physical Product(TPP)/Total Product(TP)

It is the total quantity or volume of output produced by the

employment of a certain number of units of the variable
input during a given period of time with a given level
of technology.
TPP = ∑ MPP

TPP is the sum of MPP.

DEFINITIONS
Average Physical Product(APP)/Average Product(AP)

It is the total physical product per unit of variable input

employed.
TPP
APP =
N

Where N = No. of units of variable factor employed

DEFINITIONS
Marginal Physical Product(MPP)/Marginal Product(MP)

It is the addition made to the total physical product when

one more unit of the variable input is employed

MPP = ΔTotal Output/ΔTotal Input.

OR
MPP = TPPn- TPPn-1
 RETURNS TO A FACTOR/
LAW OF VARIABLE PROPORTIONS/
LAW OF RETURNS TO A FACTOR.
Statement of the law:-
This law states that ‘if more and more units of a
variable factor are employed(with fixed factors),
Total Physical Product (TPP) increases at an
increasing rate in the beginning ,then increases at a
diminishing rate and finally starts falling.’
 ASSUMPTIONS OF THE LAW
There is no change in technology

Only one factor input changes keeping other inputs constant

Possibility of changing the factor proportion exists

All units of the variable factor employed are homogeneous

NO: OF UNITS OF MPP TPP APP
VARIABLE INPUTS PHASES
0 - 0 0

1 2 2 2 I-TPP increases at an increasing rate and MPP

increases, it is Increasing Returns to a Variable
2 4 6 3
Factor.
3 6 12 4

4 4 16 4 II-When TPP increases at a diminishing rate and

5 2 18 3.6 MPP decreases but remains positive, it is
Diminishing Returns to a Variable Factor.
6 0 18 3

7 -4 14 2 III-When TPP starts falling and MPP becomes

8 -6 8 1
negative,it is Negative Returns to a Variable
Factor.
 Pt of inflexion

E
C

Diagrammatic
representation
of the law
 POINT OF INFLEXION
The geometrical meaning of a
point of inflexion is a point where
a curve changes its direction or its
curvature/slope
PHASE - I
PHASE OF INCREASING RETURNS
TPP increases at an increasing rate (from O to A)

In this phase of production as the input of variable

factor increases the MPP tends to increase throughout,
this phase ends where MPP is maximum.

In the fig OD denotes this phase.

PHASE - II
PHASE OF DIMINISHING RETURNS
TPP increases at a decreasing rate (from A to B)
In this phase of production as the input of variable factor
increases the marginal product tends to decrease
throughout but is positive (from D to E).The phase ends
where TPP is maximum and MPP is equal to zero.
In the fig DE denotes this phase.
PHASE - III
PHASE OF NEGATIVE RETURNS
TPP starts falling(from B to C)

In this phase of production as the input of variable factor

increases the MPP continues to decrease throughout and
is negative (beyond E).

In the fig this stage is denoted by the portion of X-axis beyond point E.
The Graphical Relationship Between TPP Curve And MPP Curve:

❏ When TPP curve is upward sloping and convex (O to A), MPP curve is
upward sloping (O to D)

❏ When TPP curve is upward sloping and concave (A to B),MPP curve

is downward sloping but upto the X-axis (D to E)

❏ When TPP curve is downward sloping (B to C), MPP curve continues

to be downward sloping but is below the X-axis (to the right of
point E)
POINTS TO NOTE
Stage I ends – When MPP is maximum
TPP is increasing

Stage II ends – When MPP = 0;

TPP is maximum.

Stage III starts –When MPP becomes –ve;

TPP starts decreasing.
Most Profitable Phase Of Production
A rational firm will try
to operate in phase II
for maximizing his
profits.
 Most Profitable Stage Of Production
With increase in every additional unit of the variable input,
the APP and hence TPP will go on increasing.
The firm will therefore, continue to employ additional units
of variable input instead of stopping production.
The firm will also not operate in phase III where MPP is
negative and TPP declines.
Thus, phase II remains the most profitable phase of
production.
 REASONS BEHIND
INCREASING RETURNS TO A FACTOR
❏ Specialisation Resulting From Division Of
Labour – As the number of workers employed
increases we can practice division of labour and
specialisation which increases the efficiency
and productivity of the workers.Therefore the
output increases at an increasing rate.
REASONS BEHIND
INCREASING RETURNS TO A FACTOR
❏ Optimum Combination Of Factors and indivisibility of
capital - All machines that are produced always have an
optimal (ideal) combination with other factors.In the
begining the producer may start with sub- optimal
combination as the minimum/smallest size of the
machinery that is available is larger than his
requirement(indivisibility of capital).
REASONS BEHIND
INCREASING RETURNS TO A FACTOR

❏ Fuller Utilisation Of The Fixed Factors: In the initial

stages fixed factors remain unutilised hence additional
units of variable factors lead to fuller utilisation of fixed
factors (i.e.machinery and land).
REASONS BEHIND
DIMINISHING RETURNS TO A FACTOR
❏ Use of various factors beyond optimum capacity -
After reaching optimum combination of variable and
fixed factors efficiency starts declining when more units
of variable factors are employed as a result marginal
product starts declining.
REASONS BEHIND
DIMINISHING RETURNS TO A FACTOR
❏ Lack of perfect substitutability between factors:
The factors of production can be substituted for one
another only upto a certain limit but this in not possible
beyond a certain stage (e.g.labour for machinery).The
factors become imperfect substitutes leading to diminishing
returns
REASONS BEHIND
DIMINISHING RETURNS TO A FACTOR
❏ Fall in the quantity of fixed input per unit variable input
It results in decreasing returns to total products as the fixed
factors become too small
REASONS BEHIND
NEGATIVE RETURNS TO A FACTOR
❏ OVERCROWDING
When the number of workers becomes too large they start
coming into each other’s way and TPP starts falling instead of
increasing.
 LAW OF DIMINISHING MARGINAL RETURNS
The law states that if we keep all other
factor inputs constant and change only
one factor input, we find that the
marginal product after sometime starts
falling and ultimately may become
negative.
 RELATIONSHIP
BETWEEN
MPP AND APP
RELATIONSHIP BETWEEN MPP AND APP
B
A C

G
I G

D E
F
PHASE - I
PHASE OF INCREASING RETURNS

● In this phase of production as the input of variable factor

increases the marginal product tends to increase throughout and
reaches its maximum at G.
● The APP also increases throughout.

In the fig OD denotes this phase.

PHASE - II
PHASE OF DIMINISHING RETURNS
● In this stage of production as the number of units of
variable factor increase MPP falls continuously till it
becomes equal to zero (i.e. at point E).
● APP continues to rise (between point H and I )
● APP is maximum at the point where it is equal to MPP
(at point I) after which APP starts to fall (beyond point I).

In the fig DE denotes this phase.

PHASE - III
PHASE OF NEGATIVE RETURNS

● In this phase of production as the input of variable factor

increases the MPP continues to decrease throughout and is
negative (from E to F).
● APP also continues to fall but is positive.

In the fig this stage is denoted by the portion of X-axis between point E & F.
The Relationship Between MPP Curve And APP Curve:
A

B
The Graphical Relationship Between MPP Curve And APP Curve:

❏ When MPP curve lies above APP curve (O to A),

APP curve slopes upwards (O TO B)

❏ When MPP curve intersects APP (at point C) ,

APP curve reaches its highest point ( at point C)

❏ When MPP curve lies below the APP curve,the APP curve slopes
downwards (to the right of point C).
 TESTING YOUR UNDERSTANDING
1) What happens to TPP when MPP increases?

2) What happens to APP when MPP = APP?

3) What happens to APP when MPP falls?

 TESTING YOUR UNDERSTANDING
TYPE I: FIND APP & MPP WHEN TPP IS GIVEN
Ex 1.1 Ex 1.2
N TPP N TPP
1 10 1 20

2 25 2 50

3 50 3 90

4 60 4 100

5 65 5 105
 TYPE I: SOLUTIONS
Ex 1.1 Ex 1.2
N TPP APP MPP N TPP APP MPP
1 10 10 10 1 20 20 20

2 25 12.5 15 2 50 25 30

3 50 16.67 25 3 90 30 40

4 60 15 10 4 100 25 10

5 65 13 05 5 105 21 05

Formulas used: APP= TPP/N & MPP = TPPn - TPPn-1

 TESTING YOUR UNDERSTANDING
TYPE II: FIND TPP & MPP WHEN APP IS GIVEN
Ex 2.1 Ex 2.2

N APP N APP
1 10 1 50

2 20 2 45

3 30 3 40

4 40 4 35

5 50 5 30
 TYPE II: SOLUTIONS
Ex 2.1 Ex 2.2
N APP TPP MPP N APP TPP MPP
1 10 10 10 1 50 50 50

2 20 40 30 2 45 90 40

3 30 90 50 3 40 120 30

4 40 160 70 4 35 140 20

5 50 250 90 5 30 150 10

Formulas used: TPP= APP x N & MPP = TPPn - TPPn-1

 TESTING YOUR UNDERSTANDING
TYPE III: FIND TPP & APP WHEN MPP IS GIVEN
Ex 3.1 Ex 3.2
N MPP N MPP
1 20
1 05
2 22
2 10
3 24
3 15
4 22
4 20
5 17
5 25
6 15
 TYPE III: SOLUTIONS
Ex 3.1 Ex .32
N MPP TPP APP N MPP TPP APP
1 05 05 05 1 20 20 20

2 10 15 7.5 2 22 42 21

3 15 30 10 3 24 66 22

4 20 50 12.5 4 22 88 22

5 25 75 15 5 17 105 21

6 15 120 20

Formulas used: TPP= ∑ MPP & APP = TPP/N

 TESTING YOUR UNDERSTANDING
TYPE IV: FIND THE MISSING VALUES
Ex 4.1 Ex4.2
N TPP APP MPP N TPP APP MPP
1 10 -- -- 1 -- -- 15

2 -- 20 -- 2 -- 20 --

3 -- -- 50 3 100 -- 60

4 160 -- -- 4 -- -- 45

5 --- -- 60 5 -- 60 --

6 -- -- 70
 TYPE IV: SOLUTIONS
Ex 4.1 Ex 4.2
N TPP APP MPP N TPP APP MPP
1 10 10 10 1 15 15 15

2 40 20 30 2 40 20 25

3 90 30 50 3 100 33.33 60

4 160 40 70 4 145 36.25 45

5 220 44 60 5 300 60 155

6 370 61.67 70

Formulas used: a) TPP= ∑ MPP b) TPP=APP x N

c) APP = TPP/N d) MPP= TPPn - TPPn-1
DO IT YOURSELF
SOLUTION
DO IT YOURSELF
SOLUTION
DO IT YOURSELF
SOLUTION
 TESTING YOUR UNDERSTANDING
1) Define- a) Production function. (1m)
b) APP/MPP/TPP. (1m)
c) Variable input/fixed input. (1m)
d) short/long run. (1m)

2) State the Law of Diminishing Returns. (1m)

4) What are the three stages of production? Where will a rational producer
operate? (3/4m)

5) Explain the Law of variable proportions in terms of the behaviour of TPP

with the help of a diagram. (6m)
ANY QUESTIONS