PRODUCTION FUNCTION

MEANING OF PRODUCTION
• PRODUCTION MEANS TRANSFORMING INPUTS LIKE
LABOUR, CAPITAL, RAW MATERIALS AND TIME INTO
A VALUE ADDED OUTPUT.
• IN ECONOMIC SENSE, PRODUCTION PROCESS MAY
TAKE A VARIETY OF FORMS OTHER THAN
MANUFACTURING, LIKE WHOLESALING, RETAILING,
PACKAGING, ASSEMBLING ARE ALL PRODUCTIVE
ACTIVITIES. ANOTHER EXAMPLE COULD BE SAND
DEALER COLLECTS AND TRANSFERS SAND FROM THE
RIVER BANK TO THE CONSTRUCTION SITE.
CULTIVATION IS THE EARLIEST FORM OF PRODUCTIVE
ACTIVITY.
 PRODUCTION FUNCTION
• THE MAIN OBJECTIVE OF PRODUCTION PROCESS IS TO
ACHIEVE OPTIMUM EFFICIENCY BY MINIMIZING
PRODUCTION COST.
• PRODUCTION MANAGERS , INORDER TO MINIMIZE COST,
FACES THE QUESTIONS LIKE , HOW TO MINIMIZE COST
OF PRODUCTION?, HOW DOES OUTPUT RESPOND TO
CHANGE IN QUANTITY OF INPUTS?, HOW DOES
TECHNOLOGY MATTER IN REDUCING THE COST OF
PRODUCTION? ETC.
• PRODUCTION THEORY DEALS WITH QUANTITATIVE
RELATIONSHIPS BETWEEN INPUTS (LIKE LABOUR,
CAPITAL, RAW MATERIAL, LAND AND BUILDING,
TECHNOLOGY AND TIME,) AND OUTPUT.
 INPUT AND OUTPUT

• AN INPUT IS SIMPLY ANYTHING WHICH THE FIRM

BUYS FOR USE IN ITS PRODUCTION PROCESSES, LIKE
LABOUR, CAPITAL, RAW MATERIALS, TECHNOLOGY,
TIME, AND MANAGEMENT.

• AN OUTPUT IS ANY GOOD OR SERVICE THAT COMES

OUT OF PRODUCTION PROCESS.
 FIXED AND VARIABLE INPUTS
• IN ECONOMIC SENSE, A FIXED INPUT IS ONE WHOSE
SUPPLY IS INELASTIC IN THE SHORT RUN. THEREFORE,
ALL OF ITS USERS CANNOT BUY MORE OF IT IN THE
SHORT RUN.
• IN TECHNICAL SENSE, FIXED FACTOR IS ONE THAT
REMAINS FIXED OR CONSTANT FOR A CERTAIN LEVEL OF
OUTPUT.
• A VARIABLE INPUT IS DEFINED AS ONE WHOSE SUPPLY IS
ELASTIC IN THE SHORT RUN. EXAMPLES ARE LABOUR
AND RAW MATERIAL.
• TECHNICALLY, A VARIABLE INPUT IS ONE THAT CHANGES
WITH THE CHANGE IN OUTPUT.
• IN THE LONG RUN, ALL INPUTS ARE VARIABLE
 FACTORS OF PRODUCTION
• FACTORS OF PRODUCTION ARE AS FOLLOWS:
 LAND AND BUILDING.
 CAPITAL ( MACHINERY AND PLANTS)
 LABOUR ( UNSKILLED, SEMI SKILLED AND SKILLED)
 ENTRPRENEURS AND MANAGERS.
 TECHNOLOGY.
 RAW MATERIALS.
 TIME.
 ECONOMISTS CONSIDERS LABOUR AND CAPITAL AS FACTORS
OF PRODUCTION.
 SHORT RUN AND LONG RUN.
• THE SHORT RUN REFERS TO A PERIOD OF TIME IN WHICH
THE SUPPLY OF CERTAIN INPUTS LIKE PLANT, BUILDING,
MACHINERY ETC. IS FIXED OR IS INELASTIC. IN THE
SHORT RUN, PRODUCTION OF A COMMODITY CAN BE
INCREASED BY INCREASING THE USE OF VARIABLE
INPUTS LIKE LABOUR AND RAW MATERIALS. GENERALLY
SHORT RUN MEANS THREE OR MORE YEARS.
• LONG RUN REFERS TO A PERIOD OF TIME IN WHICH
SUPPLY OF ALL THE INPUTS IS ELASTIC. THAT MEANS IN
THE LONG RUN ALL INPUTS ARE VARIABLE. THEREFORE ,
IN THE LONG RUN PRODUCTION OF A COMMODITY CAN
BE INCREASED BY EMPLOYING MORE OF VARIABLE AND
FIXED INPUT.
SHORT RUN AND LONG RUN PRODUCTION FUNCTION.
• A PRODUCTION FUNCTION CAN BE QUANTIFIED BY
Q = f (LB,L,K,M,T,t)
WHERE LB IS LAND AND BUILDING, L IS LABOUR,
K IS CAPITAL, M IS RAW MATERIAL, T IS TECHNOLOGY
AND t IS TIME.
HOW EVER ECONOMISTS USES ONLY LABOUR(L) AND
CAPITAL(K) AS INPUTS. IN THAT CASE PRODUCTION
FUNCTION IS EXPRESSED AS FOLLOWS:
Q = f (L, K) WHERE L= LABOUR AND K = CAPITAL.
THIS IS DONE BY CLUBBING ‘LB’ AND ‘T’ WITH
CAPITAL(K).
 PRODUCTION FUNCTION.
• IN THE SHORT RUN , THE OUTPUT IS DEPENDENT ON
VARIATION OF LABOUR SINCE CAPITAL (K) IS
CONSTANT. IF ONE TRIES TO INCREASE OUTPUT HE
HAS TO INCREASE LABOUR. IN SUCH A CASE
PRODUCTION FUNCTION CAN BE AS FOLLOWS:
Q = b L WHERE b = dQ/dL which gives
constant return to scale.
IN THE LONG RUN ALL INPUTS ARE VARIABLE MEANING
CAPITAL (K) IS ALSO A VARIABLE.
 COBB DOUGLAS PRODUCTION FUNCTION

• COBB DOUGLAS PRODUCTION FUNCTION CAN BE

EXPRESSED AS

Q = Aka Lb
where A, a and b are parameters and b = 1-a
 ISOQUANT
10 158 223 274 316 354 387 418 447 474 500
9 150 212 260 300 335 367 397 424 450 474
8 141 200 245 283 316 346 374 400 424 447
7 132 187 229 264 296 324 350 374 397 418
6 122 173 212 245 274 300 324 346 367 387
5 112 158 194 224 250 274 296 316 335 354
4 100 141 173 200 224 245 264 283 300 318
3 87 122 150 173 194 212 229 245 260 274
2 70 100 122 141 158 172 187 200 212 224
1 50 70 87 100 112 122 132 141 150 158
K L 1 2 3 4 5 6 7 8 9 10
 SHORT RUN LAWS OF PRODUCTION

• THE LAWS OF PRODUCTION STATES THE INPUT AND

OUTPUT RELATIONSHIP. IN THE SHORT RUN ONLY
LABOUR IS VARIABLE AND CAPITAL IS CONSTANT.
• UNDER THIS CONDITION THE LAWS OF PRODUCTION ARE
CALLED THE ‘LAWS OF VARIABLE PROPORTIONS’ OR ‘THE
LAWS OF RETURNS TO A VARIABLE INPUT’.
• THE LAW OF DIMINISHING RETURN STATES THAT WHEN
MORE AND MORE UNITS OF A VARIABLE INPUT ARE
USED WITH A GIVEN QUANTITY OF CAPITAL, THE TOTAL
OUTPUT OR TOTAL PRODUCT MAY INITIALLY INCREASE AT
A INCREASING RATE AND THEN AT A CONSTANT RATE,
BUT EVENTUALLY INCREASE AT A DIMINISHING RATES.
 ASSUMPTIONS OF LAWS OF DIMINISHING RETURN.

1. LABOUR IS THE ONLY VARIABLE UNIT

2. LABOUR IS HOMOGENOUS
3. THE STATE OF TECHNOLOGY IS GIVEN
4. INPUT PRICES ARE GIVEN.
 EXAMPLE

• WE TAKE A CASE OF COAL PRODUCTION WITH GIVEN

MINING MACHINERY (K) AS CONSTANT AND LABOUR
AS VARIABLE. LET US ASSUME LABOUR – OUTPUT
RELATIONSHIP AS:

Q = -L^3 +15 L^2 + 10 L

THIS IS THE TOTAL PRODUCT OR TOTAL
OUTPUT.
CALCULATE THE TOTAL PRODUCT(Q) WHEN
L=5 ?
 MARGINAL PRODUCTIVITY
• MARGINAL PRODUCTIVITY (MP) IS THE
INCREAMENTAL OUTPUT IF ONE MORE LABOUR IS
EMPLOYED. THIS IS ALSO THE SLOPE OF TOTAL
PRODUCT CURVE.
• MP = dQ/dL = -3L^2 + 30 L + 10
• IN OUR CASE WE CANNOT USE CALCULUS BECAUSE
LABOUR IS NOT DIVISIBLE LIKE HALF LABOUR OR 1/3
LABOUR.
• SO WE USE MP = TP(L) – TP(L-1).
CALCULATE MP WHEN TP(L) = 384 AND TP(L-1)=300 GIVEN
L=6.
 AVERAGE PRODUCTIVITY OF LABOUR

• AVERAGE PRODUCTIVITY OF LABOUR ( AP) IS

AVERAGE CONTRIBUTION OF A LABOUR.

• AP = TP/L = ( -L^3 + 15L^2 + 10 L)/ L = -L^2 +15 L + 10

• CALCULATE AP WHEN L= 5 ?
 PRODUCTION DATA
NO OF WORKERS(N) TOTAL PRODUCT(TP) MARGINAL PRODUCT(MP) AVERAGE PRODUCT(AP)
1 24 24 24
2 72 48 36
3 138 66 46
4 216 78 54
5 300 84 60
6 384 84 64
7 462 78 66
8 528 66 66
9 576 48 64
10 600 24 60
11 594 -6 54
12 552 -42 46
 TOTAL PRODUCT CURVE
NO OF WORKERS(N) TOTAL PRODUCT(TP) MARGINAL PRODUCT(MP) AVERAGE PRODUCT(AP) TOTAL PRODUCT CURVE
1 24 24 24 700

2 72 48 36 600
3 138 66 46
4 216 78 54 500

5 300 84 60

TOTAL OUTPUT
400

6 384 84 64
300
7 462 78 66
8 528 66 66 200

9 576 48 64 100
10 600 24 60
11 594 -6 54 0
1 2 3 4 5 6 7 8 9 10 11 12

12 552 -42 46 NO OF LABOUR

 AVERAGE PRODUCT CURVE
NO OF WORKERS(N) TOTAL PRODUCT(TP) MARGINAL PRODUCT(MP) AVERAGE PRODUCT(AP) AVERAGE PRODUCT CURVE
1 24 24 24 70

2 72 48 36 60

3 138 66 46
50
4 216 78 54
5 300 84 60 40
AVERAGE
6 384 84 64 PRODUCT
30
7 462 78 66
8 528 66 66 20

9 576 48 64
10
10 600 24 60
11 594 -6 54 0
1 2 3 4 5 6 7 8 9 10 11 12
12 552 -42 46 NO OF LABOUR
 MARGINAL PRODUCT CURVE
NO OF WORKERS(N) TOTAL PRODUCT(TP) MARGINAL PRODUCT(MP) AVERAGE PRODUCT(AP) MARGINAL PRODUCT CURVE
1 24 24 24 100

2 72 48 36 80

3 138 66 46
60
4 216 78 54
5 300 84 60 40

6 384 84 64 MARGINAL
PRODUCT
20

7 462 78 66
0
8 528 66 66 1 2 3 4 5 6 7 8 9 10 11 12

9 576 48 64 -20

10 600 24 60 -40

11 594 -6 54
-60
12 552 -42 46 NO OF LABOUR
 TOTAL PRODUCT AND MARGINAL PRODUCT
NO OF WORKERS(N) TOTAL PRODUCT(TP) MARGINAL PRODUCT(MP) AVERAGE PRODUCT(AP) TOTAL PRODUCT & MARGINAL
1 24 24 24 PRODUCT
700
2 72 48 36
3 138 66 46 600

4 216 78 54 500

5 300 84 60 400

6 384 84 64
TP & MP 300
7 462 78 66
8 528 66 66 200

9 576 48 64 100

10 600 24 60 0

11 594 -6 54 1 2 3 4 5 6 7 8 9 10 11 12

-100
12 552 -42 46 NO OF LABOUR
 AVERAGE PRODUCT & MARGINAL PRODUCT
NO OF WORKERS(N) TOTAL PRODUCT(TP) MARGINAL PRODUCT(MP) AVERAGE PRODUCT(AP) AP & MP CHART
100
1 24 24 24
2 72 48 36 80

3 138 66 46
60
4 216 78 54
5 300 84 60 40

MARGINAL
6 384 84 64 PRODUCT &
20
AVERAGE
7 462 78 66 PRODUCT
0
8 528 66 66 1 2 3 4 5 6 7 8 9 10 11 12

9 576 48 64 -20

10 600 24 60
-40
11 594 -6 54
12 552 -42 46 -60
NO OF LABOUR
 TOTAL PRODUCT & AVERAGE PRODUCT
NO OF WORKERS(N) TOTAL PRODUCT(TP) MARGINAL PRODUCT(MP) AVERAGE PRODUCT(AP) TOTAL & AVERAGE PRODUCT
CURVE
1 24 24 24 700

2 72 48 36
3 138 66 46 600

4 216 78 54 500

5 300 84 60
400
6 384 84 64 TP & AP TOTAL
PRODUCT(TP)
7 462 78 66 300
AVERAGE
PRODUCT(AP)
8 528 66 66 200

9 576 48 64
100
10 600 24 60
11 594 -6 54 0
1 2 3 4 5 6 7 8 9 10 11 12
12 552 -42 46 NO OF LABOUR
 TOTAL PRODUCT, AVG PRODUCT & MARGINAL
PRODUCT
700

600

500

400

TOTAL PRODUCT(TP)
TP/AP/MP 300
MARGINAL PRODUCT(MP)
AVERAGE PRODUCT(AP)

200

100

0
1 2 3 4 5 6 7 8 9 10 11 12

-100
NO OF LABOUR