Production Function

Law of Variable Proportions

• “The law of variable proportion states that if
the inputs of one resource is increased by
equal increment per unit of time while the
inputs of other resources are held constant,
total output will increase, but beyond some
point the resulting output increases will
become smaller and smaller.”
 Law of Returns to Scale
• “The term returns to scale refers to the
changes in output as all factors change by the
same proportion.” Koutsoyiannis
Unit Scale of Production Total Returns Marginal Returns
1 1 Labour + 2 Acres of Land 4 4
2 2 Labour + 4 Acres of Land 10 6 Increasing Returns
3 3 Labour + 6 Acres of Land 18 8
4 4 Labour + 8 Acres of Land 28 10
5 5 Labour + 10 Acres of Land 38 10 Constant Returns
6 6 Labour + 12 Acres of Land 48 10
7 7 Labour + 14 Acres of Land 56 8 Decreasing Returns
8 8 Labour + 16 Acres of Land 62 6
 Isoquants
• An isoquant is a curve on which various
combinations of labour and capital show the
same output.
Combination Units of Capital Units of Labour Total Output
A 9 5 100
B 6 10 100
C 4 15 100
D 3 20 100
 Properties of Isoquants
• Isoquants are negatively sloped
• An isoquant lying above and to the right of
another represents a higher output level
• In between two isoquants there can be a
number of isoquants showing various levels of
output which the combination of two factors
can yield
• Units of output shown on isoquants are
arbitrary
• Each isoquant is convex to the origin – MRTS
• Ridge Lines – A firm will produce only in those
segments of the isoquants which are convex
to the origin and lie between the ridge lines