Productivity concerns

at RKC
GROUP 5
Mahesh Telangi Praveen P A. Santosh Kumar

Harsh Kumar Akshay Sagar

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CONCEPTS

• Returns of Scale/Law of Variable Proportions

• Importance of Production and cost analysis
• Production Function
• Isoquants
• Economies of Scale and Scope
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Returns to scale/law of variable proportions

• Definition:
“The term returns to scale refers to the changes in output as all factors change by the same
proportion.”
“Returns to scale relates to the behavior of total output as all inputs are varied and is a long
run concept”.
• Returns to scale types:
A. Constant Returns to scale.
B. Increasing Returns to Scale
C. Diminishing Returns to Scale
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Analysis of given data

90

80

No of workers Total Productivity Average productivity

Marginal productivity 70
0 0 0 0 Stage 1
60
1 10 10.00 10
2 22 11.00 12 50
3 36 12.00 14 Stage 2
4 52 13.00 16 40
5 66 13.20 14
30
6 76 12.67 10 Stage 3
7 82 11.71 6 20
8 85 10.63 3
10
9 85 9.44 0
10 83 8.30 -2 0
1 2 3 4 5 6 7 8 9 10 11
-10
Total Productivity Average productivity Marginal productivity
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Importance of Production and cost analysis

• Definition:
“The term returns to scale refers to the changes in output as all factors change
by the same proportion.” Koutsoyiannis
“Returns to scale relates to the behavior of total output as all inputs are varied
and is a long run concept”. Leibhafsky
• Returns to scale types:
1. Increasing Returns to scale.
2. Constant Returns to Scale
3. Diminishing Returns to Scale
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Stage 1

• Total productivity
Increases at increasing rate and then at diminishing rate
• Marginal productivity
Increases in the beginning then reaches a maximum and begins to decrease
• Average productivity
First increases, continues to increase and become maximum
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Stage 2

• Total productivity
Continues to increases at diminishing rate and become maximum
• Marginal productivity
Continues to diminish and becomes equal to zero
• Average productivity
Becomes equal to Marginal productivity and begins to diminish
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Stage 3

• Total productivity
Diminishes
• Marginal productivity
Becomes Negative
• Average productivity
Continues to diminish but will remain positive
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Activity Labour Capital
Choosing and buying the site
Designing and building
Buying, planning materials and labor
Levelling the land

Labour Intensive &

Drawing the layout of the building
Excavation and laying the foundation
Erecting the frame of the building
Initial wiring
Putting the roof
Capital Intensive
Classification
Constructing the walls and interiors
Plastering of ceiling and walls
Plumbing and wiring
Finishing the inside walls and paintings
Installing fixtures
Flooring
Painting
Decorating and Landscape
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EXAMPLE

250 Isoquant
200 • Q = A x L^α x K^ β
150 Assuming:
100
A, α , β = 1
50

0
50 100 150 200 250 300 350 400 450 500 550
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ECONOMIES OF SCALE ECONOMIES OF SCOPE

• Cost advantage when there is an • The average total cost of a company's

increased output of a good or service production decreases when there is an
due to the inverse relationship between increasing variety of goods produced.
the average cost per unit and output
level
• Complementary variety of products
• Quantity of output is increased
• Eg: Facility management services
• Eg: More labour inducted into work provided in addition to construction
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GRAPHS
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