CHAPTER 7

SHORT – RUN AND LONG – RUN

ANALYSIS OF PRODUCTION

ECONOMICS
 FIXED PROPORTION PRODUCTION FUNCTION

The technology requires a fixed

combination of inputs to produce
a given level of output.
VARIABLE PROPORTION PRODUCTION FUNCTION

The technology requires several

alternative combinations of factors
of production to produce a given
level of output.
SHORT RUN AND LONG RUN PRODUCTION FUNCTION

This functional relationship (of dependence)

between the variable input quantities and the
output quantity is called the short run
production function.
This functional relation of dependence between
all the inputs used by the firm and the quantity
of its output is called the long run production
function of the firm.
LAW OF VARIABLE PROPORTION

Law of Variable Proportion is regarded as an important

theory in Economics. It is referred to as the law which
states that when the quantity of one factor of production
is increased, while keeping all other factors constant, it
will result in the decline of the marginal product of that
factor.
Law of Variable Proportion is also known as the Law of
Proportionality. When the variable factor becomes more,
it can lead to negative value of the marginal product.
 LAW OF DIMINISHING MARGINAL RETURNS

The law of diminishing marginal returns states

that adding an additional factor of production
results in smaller increases in output. After
some optimal level of capacity utilization, the
addition of any larger amounts of a factor of
production will inevitably yield decreased per-
unit incremental returns.
 LAW OF RETURNS TO SCALE

Laws of return to scale refers to the long- run analysis of law of the
production . The term return to scale refers to the degree by which
output changes as a result of given change in the quantity of all inputs
used in production.
 I) CONSTANT RETURN TO SCALE

If output increase in the same

proportion as the increase in inputs,
return to scale are said to be constant.
Eg: oa=ab=bc.
 II) INCREASING RETURNS TO SCALE :

When the output increase at a greater

proportion than the increase in inputs ,
return to scale are said to be increasing.
Eg: oa>ab>bc.
 III) DECREASING RETURN TO SCALE :

When the output increase in a smaller

proportion than the increase in all
inputs return to scale are said to be
decreasing. Eg: oa <ab <bc
 I) HOW TO MEASURE COEFFICIENT OF OUTPUT ELASTICITY?

QE = Percentage change outputs___________ Percentage change in all inputs.

If EQ=1, we have constant return to scale.
If EQ= > 1 we have increasing return to scale.
If EQ= < 1 we have Decreasing return to scale.
1I) FACTORS RESPONSIBLE FOR RETURNS TO SCALE

According to economic theory as the size of a

firm increasing ,the firm will face successfully
return ,followed by constant return and then
decreasing returns to scale .
This is due to indivisibility of some factors.