OBJECTIVES:

 Production function
Unit – 3  Short run and long run
Producer production function
 Concept of production
Behavior and  Variable and fixed factors
Supply:  Law of variable proportion
Production  Law of diminishing returns
Function  Relationship between TP
and MP , AP and MP
 Numerical Examples
  Creation of utility

 Transformation of inputs into outputs

PRODUCTION  Land labor and capital are the

common inputs for production of
goods and services.

 Production includes not only

production of physical goods like –
cloth ,rice ,T.V. etc. but also services
of doctor ,teacher ,lawyer etc.
Production Function
 Physical relationship between inputs used and
resulting output.
 Production function is the process of getting the
maximum output from a given quantity of inputs
in a particular time period . It includes only
technically efficient combinations of input.
 Q = f(l , k, )
 40 x = f(5 l ,4k)
 Production function is the relationship between
a firm’s production and the material factors of
production. - Watson
TYPES OF PRODUCTION FUNCTION

 SHORT RUN – It refers to production in

short –run where there are some fixed
factors.

 LONG RUN – It refers to production in the

long run where all factors are in variable
supply.
FIXED AND VARIABLE FACTORS
CONCEPT OF PRODUCTION

 TOTAL PHYSICAL PRODUCT (TPP)-Total quantity

of  goods and services produced by a firm with
the given inputs during a specific period of time.

 Shape of TPP –It start from origin ,increases at

increasing rate , then increases at decreasing rate
, reaches maximum and after it starts falling. 
 TPP curve

B C

TPP
AVERAGE PRODUCT

 The amount of output produced per unit of the variable factor

(labor) employed
Unit of labor TPP AP=TP
 AP = TPP / LABOUR INPUT /L
 Initial AP =0 (no labor) 0 0 0
 Increase till 3 – units 1 4 4
 Reaches max when L = 4 2 10 5
 After 4 units of labor –declining 3 16 5.3
 AP curve is inverted U 4 24 6
5 28 5.6

6 30 5

7 30 4.3

8 28 3.5
 Y AVRAGE PRODUCT
CURVE

AVERAGE
PRODUCT

AP

X
0
UNIT OF LABOR
MARGINAL PRODUCT (MP)
 It is defined as change in TPP resulting from the employment of
an additional unit of a variable factor .
 MP = change TP / change L Unit labor TPP MP=TP
 MP = TPP n – TPP n-1 n-TP n-1
0 0 -

1 4 4

2 10 6

3 18 8

4 24 6

5 28 4

6 30 2

7 30 0

8 28 -2
MP CURVE
MP achieves its maximum before AP reaches its
maximum
 Relationship between TP ,AP And MP

Fixed Variable TPP AP MP

factor factor
(land) (labor)
1 acre 0 0 0 -
1Acre 1 4 4 4
1Acre 2 10 5 6
1Acre 3 18 6 8
1Acre 4 24 6 6
1Acre 5 28 5.6 4
1acre 6 30 5 2
1acre 7 30 4.3 0
1acre 8 28 3.5 -2
 COMPLETE
LABOR MP TP AP

1 3

2 5

3 7

4 5

5 3

6 1