LONG RUN PRODUCTION

FUNCTION
Long run is the period in which the supply of
labour and capital is elastic. It implies that
labour and capital are variable inputs. The long
run production function can be expressed as:
Q = f (L, K)
where
L= labour, which is variable K=capital, which is
variable
In the long run, inputs-output relations are
studied by the laws of re- turns to scale.
 LAW OF RETURN TO SCALE

The law of returns to scale explains the proportional change

in output with respect to proportional change in inputs.
The assumptions of returns to scale are as follows:
• The firm is using only two factors of production that are
capital and labour.
• Labour and capital are combined in one fixed proportion.
• Prices of factors do not change.
• State of technology is fixed.

There are three aspects of the laws of returns:

Increasing returns to scale
Constant returns to scale
Diminishing returns to scale
1. INCREASING RETURN TO SCALE

It is a situation in which output increase by a

greater proportion than increase in factor inputs.
For example, to produce a particular prod-uct, if the
quantity of inputs is doubled and the increase in
output is more than double, it is said to be an
increasing returns to scale. When there is an
increase in the scale of production, the average cost
per unit produced is lower. This is because at this
stage an organisation enjoys high economies of
scale. Figure I shows the increasing re- turns to
scale
As shown in Figure 1, a movement from A to B shows that
the amount of input is doubled. When labor and capital
are doubled from 2 to 4 units, output increases more
than double, that is, from 50 units to 120 units. This is
increasing returns to scale, which occurs because of
economies of scale.
2. Constant Returns to scale:
A constant return to scale implies the situation in which an increase in
output is equal to the increase in factor inputs. For example in the
case of constant returns to scale, when the inputs are doubled, the
output is also doubled. Figure 2 shows the constant returns to scale
 As shown in Figure 2, a movement from A to B
shows that the amount of input is doubled.
When labor and capital are doubled from 2 to
4 units, output also doubles from 50 units to
100 units. This is constant returns to scale.

3. Diminishing Return to Scale:

Diminishing returns to scale refers to a situation in
which output in- creases in lesser proportion than
increase in factor inputs. For example, when capital
and labour are doubled, but the output generated
is less than double, the returns to scale would be
termed as diminishing returns to scale. Figure 3
shows the diminishing returns to scale.
As shown in Figure 3, a movement from A to B shows that the
amount of input is doubled. When labor and capital are
doubled from 2 to 4 units, output increases less than double
that is from 50 units to 80 units. This is diminishing returns to
scale. Diminishing returns to scale is due to diseconomies of
scale, which arises because of managerial inefficiency.
 ISOQUANT CURVES

An isoquant curve is the representation of a set of locus of

different combinations of two inputs (labor and capital)
which yield the same level of output. Thus, an isoquant
may also be defined as the graphical representation of
different combinations of two inputs which give same level
of output to the producer. Since all the combinations lying
in an isoquant curve yield the same level of production, a
producer is indifferent between the combinations.
It is also known as or equal product curve or producer’s
indifference curve.The term ISO implies equal and quant
means quantity or output.
Isoquant curves are also called as equal product curves or
production indifference curves.
Technology of production is given over a period of time.
Factors of production are used with full efficiency. The table
shows the different combinations of two factor inputs, name- ly,
labour and capital for producing 100 tonnes of output:

Table 1: isoquant schedule

Combinations Labor (L) Capital (K) Output
(units)
A 1 12 100
B 2 8 100
C 3 5 100
D 4 3 100
E 5 2 100
 ASSUMPTIONS OF ISOQUANT CURVE
1. Optimum Combinations:
All the possible combinations of the production factors
are efficient, yielding the same output and quality.
2. Two Factors of Production: There are only two factors
involved in the production function, as we can say that
‘Q=f(L, K)’.
3. Steady Production Technique: The production method
or technology remains static throughout the process.
4. Technical Substitution Possible: The factors of
production should be such that it is possible to substitute
one with the other, like labour and capital.
5. Divisible Factors of Production: The production factors
should be quantifiable or divisible into lesser units or
smaller proportion.
 Properties of the isoquant curves
1. Isoquant curves slope downwards:
It implies that the slope of the isoquant curve is negative. This is because when
capital (K) is in- creased, the quantity of labour (L) is reduced or vice versa, to keep
the same level of output.
2. Isoquant curves are convex to origin: It implies that
factor inputs are not perfect substitutes. This property
shows the substitution of inputs and diminishing
marginal rate of technical substitution of isoquant. The
marginal significance of one input (capital) in terms of
another input (labour) diminishes along with the
isoquant curve.
3. Isoquant curves cannot intersect each other: An
isoquant implies the different levels of combination
producing different levels of in-puts. If the isoquants
intersect each other, it would imply that a single input
combination can produce two levels of output, which is
not possible. The law of production would fail to be
applicable.
4. The higher the isoquant the higher the output: It implies
that the higher isoquant represents higher output. The upper
curve of the isoquant produces more output than the curve
beneath. This is because the larger combination of input results
in a larger output as compared to the curve that is beneath it.
 ISO-COST CURVE
• Iso-cost curve is the locus of points of all different
combinations of labour and capital that an
organisation can employ, given the price of these
inputs. Iso-cost line represents the price of factors
along with the amount of money an organisation is
willing to spend on factors. In other words, it shows
different combinations of factors that can be
purchased at a certain amount of money. The slope
of the iso-cost line depends upon the ratio of price of
labour to the price of capital.
• For example, a producer has a total budget of `120,
which he wants to spend on the factors of
production, namely, X and y. The price of X in the
market is `15 per unit and the price of y is `10 per
unit. Table 7.5 depicts the combinations:
 COMBINATION OF X AND Y

combinations units of x units of Y Total

expenditure
L 8 (8x15=120) 0 120

B 6 (6x15=90) 3 (3x10=30) 120

C 4 (4x15=60) 6 (6x10=60) 120

D 2 (2x15=30) 9 (9x10=90) 120

H 0 12 (10x12=120) 120
 8

X 6
4 X
2 6 8 10 12

6 8
X 10 12
y
X

• As shown in the figure, if the producer spends the whole amount of money to
purchase X, then he/she can purchase 8 units of X. On the other hand, if the
producer purchases y with the whole amount, then he/she would be able to
get 12 units. If points H and L are joined on X and y axes, respectively, then a
straight line is obtained, which is called iso-cost line. All the combinations of X
and y that lie on this line, would have the same amount of cost that is `120.
Similarly, other iso-cost lines can be plotted by taking cost more than `120, in
case the producer is willing to spend more amount of money on the production
factors
 PRODUCER EQUILIBRIUM

Producer’s equilibrium implies a situation in which

a producer maxi- mises his/her profits. Thus, he
/she chooses the quantity of inputs and output with
the main aim of achieving the maximum profits. In
oth- er words, he/she needs to decide the
appropriate combination among different
combinations of factors of production to get the
maximum profit at the least cost. Least cost
combination is that combination at which the
output derived from a given level of inputs is
maximum or at which the total cost of producing a
given output is minimum.