Production

CLASS 11
MICRO ECONOMICS
 NOTES
PRODUCTION
Production means the creation of utility but in economics it
means the transformation of input into output.

Production function Q = f(K,L,T)

Q = Output, K = Capital, L= Labour , T = Technology
Production function is the relationship between physical input
and physical output.

Types of production function

1.Short run production function

It refers to short period of time in which 2 factors are available
such as
1) Fixed factor
2) Variable factor

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 NOTES
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1) Fixed factor
The factors which remains fixed in short run even when there is
change in quantity of output is known as fixed factor.
Example land , Building etc..

2) Variable factor
The factors which can be changed due to the change in quantity
of output is known as variable factor.
Example Labour, Raw material, Fuel etc.

2. Long run production function

It refers to long period of time in which only one factor is
available (i.e. variable factor).All the available factors are variable
in nature under long run because a producer can change all the
factors of production due to availability of time.

Types of products
I. Total product
It is the sum of total quantity of output produced by all the units
of variable factor along with some units of fixed factor used in
the process of production.

II. Average product

It refers to the output per unit of variable factor employed.

A.P = (TOTAL PRODUCT )

(UNITS OF VARIABLE FACTOR)

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PRODUCTION
III. Marginal product
It refers to an additional product which can be derived by
employing one more unit of variable factor.
In other words, it refers to the change in total product with
respect to the change in variable inputs (labour).
MP = TPN- TPN - 1
TPn = Total product at current unit of production
TPn-1 = Total product at previous unit of production.

MP = ∆TP/∆Q
Where, ∆TP= Change in TP
∆Q = Change in per unit of variable factor.

Fixed Variable factor Total Product Average Product Marginal Product

factor(land) (labour)

1 0 20 20 20

1 2 50 25 30

1 3 90 30 40

1 4 116 29 26

1 5 130 26 14

1 6 130 21.6 0

1 7 125 17.8 -5

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Total Product Marginal product

When TP increases MP also increases

When TP increases at a constant rate MP becomes constant

When TP increases at a decreasing rate MP starts decreasing

When TP becomes maximum MP becomes 0

TP declines but remains positive MP becomes negative

Law of variable proportions/ Law of diminishing return to the

factor
Law This is an important theory of production. It is related to short
run production function. The theory states that “As we increase the
quantity of only one input (Variable) keeping other factor
constant(fixed), then the total product initially increases at an
increasing rate, then at decreasing rate and finally at a negative
rate”.

In other words, As we employ more and more units of variable

factor with the given fixed factor. The proportion between variable
factor and output changes in such a way that the resulting output
(MP) at first increases, then diminishes and finally becomes 0(zero)
and negative.

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Assumptions
• This theory is related to short run production function.
• There are 2 factors of production (both fixed and variable).
• Technology remains constant.
• This law applies of field only.

Schedule

Land Labour TP AP MP

1 1 100 100 100

1 2 210 105 110

1 3 330 110 120

1 4 420 105 90

1 5 490 98 70

1 6 490 81.6 0

1 7 488 69.7 -2

Point F - Point of inflexion Diagram

(Maximum MP)

The law of variable proportion is explained in the above table and

diagram in which x-axis represents units of variable inputs
employed whereas y-axis represents TP, AP and MP.
The diagram is divided into 3 stages of production which are as
follows
1. Increasing return 2. Decreasing return 3. Negative return

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1. Increasing return
This is the first stage of production in which both Average and
Marginal Product increases, so that the Total Product also
increases. Point ‘F’ is known as inflexion which means that the
Marginal product increases steadily till this point.
When average and marginal product both are equal then this stage
gets completed.

2. Diminishing return
It is the second stage of production in which both Average product
and marginal product declines and when total product reaches to
maximum (MP=0) the second stage of production is completed.

3. Negative return
It is the last stage of production in which the total product
declines due to negative Marginal product of the labour (but the
Average product always remains positive)

Causes of Increasing return

i. Better utilization of fixed factor
ii. Better co-ordination between the factors
iii. Increases the efficiency of labour

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Causes of diminishing return

i. Fixity of the factor(land)
ii. Imperfect substitute of the factors
iii. Less co-ordination between the factors

Causes of negative return

i. Limitation of fixed factor
ii. Poor co-ordination between the factors
iii. Decrease in efficiency of variable factor

Average product Marginal product

AP = TP/Q MP= TPn – TPn-1

When AP increases MP also increases

But the rate of increase in MP is greater
than the rate of AP

When AP is Maximum MP cuts it from above and AP=MP

When AP decreases MP also decreases

But the rate of decrease in MP is greater
than the rate of AP

AP declines but remains positive MP declines and becomes negative

When AP is constant MP also remains constant

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