Dr.

Vanita Ahlawat Gagan Deep Sharma

{Assistant Professor} 210101030029

@HSB M.Com/Group 1
 Subject Matter :-

Definition of Production
Production function
Short Run & Long Run Production
Function
Law Of Variable Production
Marginal Rate of Technical Substitution
Return To Scale
 Definition of Production
Production means the Process of using the
Factors of Production to Produce goods and
services.

Production is the Process of transformation

inputs into outputs.
 Production function
• Production function is a schedule that shows the
highest level of output the firm can produce from a
give combination of inputs ,if technical choice are
available.
• Production function can be expressed with the
following equation :
Y = f (L,K,R,S,v,y)
Where, Y=Output, L=Labour inputs, K=Capital inputs,
R=Raw materials, S=Land input, v=returns to scale,
y=efficiency parameters.
 Two types of Inputs (factors)
 Fixed factors
• An input which the quality does not changes according
to the amount of outputs
• Example : Machinery, Land, Building, etc.

 Variable Factors
• An inputs which the quantity changes according to the
amount of output.
• Example : Raw material, Labors services, Electricity, etc.
 Short Run & Long Run Production Function

• Short Run is that Period of time in which one or more

factors of production or inputs are fixed and others
are variable.
The relation between inputs and outputs in the short
run is studies under the law of Variable Proportion.

• Long Run is that Period of time in which all factors of

production or inputs are variable.
In long run we studies Change in Scale under the law
of Returns.
 Short Run Production Function

In the short run, we assumed that at least one

of the inputs is fixed that is Capital.
There, in the short run the production
function defined as :
Q = f(L,K)

Where , Q= Output, L= Labour, K= Capital(fixed)

 Variation of Output
• Total Product (TP) :- Total Product of a variable factor
is the maximum output produced by combining a given
input of that factor with the fixed factor.
• Average Product(AP) :- Average Product of a variable
factor is simply the total product of the factor divided
by the total unit of the variable factor.

AP = TP÷L
where, L= Total unit of variable factor in which is assumed to be
labour.
• CONTINUED.....
• Marginal Product (MP) :- Marginal product of
a variable factor is the change in total product
resulting from the use of one more or less unit
of the variable factor.

MP = ΔTP÷ΔL MPn = TPn-TPn-1

Where, MP= Marginal Product, ΔTP= Change in total product,

ΔL= Change in variable factor which is assumed to be labour.
• CONTINUED.....
 Relation between Average product and
Marginal product :

1. The average product increase when marginal

product is greater than average product.
2. The average product is at its maximum when both
marginal product and average product are equal.
3. The average product decreases when marginal
product is less than average product.
4. Marginal product can be positive; zero or negative,
but average product is always positive.
 Law of Variable Proportion
• The law of variable proportion is that law which
predicts the consequences of varying the
proportions in which the fixed and variable factors
of production are used.
• “The law of variable proportions states that if the
input of one resource is increments 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”
• CONTINUED.....

 Assumptions of law of variable proportion :

1. One of the factor is variable while all other factors

are fixed.
2. All units of variable factor are homogeneous or
equally efficient.
3. There is no change in the technique of production .
4. Factors of production can be used in different
proportion, for example, 2 hectares of land with 1
labourer; or 2 hectares of land with 4 labourers etc.
 Explanation of the Law of variable proportion :
 Stage 1: O-M (Boundary line MF)

MP>AP
TP increasing at increasing
Total rate.
product AP=MP

Stage 2: M-N (Boundary line NG)

MP=0(Zero)
TP at Maximum.
AP being diminish
Average &
Marginal
product Stage 3: Beyond N

MP= -VE
TP starts Declining
AP continues diminish but
always remains +VE
No. of labourers
 Three stages of Production :
 Returns to a Factor
• CONTINUED.....

• As more and more units of labour are

combined with the fixed amount of capital,
total output tends to increase at the
increasing rate. Marginal product of the factor
(labour) is increasing.

• Fig. (A) Total product is increasing at the

increasing rate, while Fig.(B) shows increasing
marginal product of the variable factor.
• CONTINUED.....
 Increasing returns to a factor :- “as the proportion
of one factor in a combination of factors is
increased, upto a point, the marginal productivity
of the factor will increase”
 Causes of its application
1. Underutilization of the fixed factor
2. Increase in efficiency
3. Better coordination between the factors

COST Diminishing
• CONTINUED.....

• As more and more units of labour are combined with

the fixed amount of capital, total output increases only
at the constant rate. Marginal product of the variable
factor (labour) remains constant.

• In Fig. (A), total product is increasing at the constant

rate indicated by an upward sloping straight line TP
curve. Fig. (B), shows constant marginal product of the
variable factor, indicated by horizontal straight line MP
• CONTINUED.....
 Constant returns to a factor :- “If the actions of
the law of increasing and diminishing returns are
balanced, we have the law of constant returns.”
 Causes of its application
1. Optimum utilisation of the fixed factors
2. Ideal factor ratio
3. Most efficient utilisation of the variable factor.

COST Constant
• CONTINUED.....

• In Fig. (A), total product is increasing at the

decreasing rate as indicated by the slope of TP
curve. At point P, it becomes maximum and,
beyond that, it starts reducing.
• Fig. (B) shows diminishing marginal product of
the variable factor, indicated by downward
sloping MP curve. Beyond a point it becomes
zero or even negative. The law can be postponed
by improving the technique of production.
• CONTINUED.....
 Diminishing returns to a factor :- “An increase in the capital
and labour applied in the cultivation of land(fixed) causes in
general a less than proportionate increase in the amount of
produce raised, unless it happens to coincide with an
improvement in the art of agriculture.”
 Causes of its application
1. Fixity of the Factor
2. Imperfect Factor Substitutability
3. Poor coordination between the factors.

COST Increasing
 Long Run Production Function

Isoquants
• “An isoquants is a curve showing all possible
combinations of inputs physically capable of
producing a given level of output.”
• “An isoquant curve may be defined as a curve
showing the possible combinations of two
variable factors that can be used to produce
the same total product.”
Y= f(L,K)
• CONTINUED.....

 Characteristics of isoquant curve

• Isoquant curve slope downwards

• Isoquant curve are convex to the origin
• Two IQ curves cannot intersect each other
• The higher the isoquant curve the higher level of
output it represents
• Knowledge of the case of factor substitution
• Ridge lines
 Marginal Rate of Technical Substitution

• The marginal rate of technical substitution (MRTS) is an

economic theory that illustrates the rate at which one
factor must decrease so that the same level of
productivity can be maintained when another factor is
increased.

MRTS(K,L)=−ΔK÷ΔL​=MPK÷MPL​
where, K=Capital, L=Labor, MP=Marginal products of each input,
ΔL/ΔK​=Amount of capital that can reduced
when labor is increased (typically by one unit)​
 Return To Scale
• “Returns to scale relates to the behaviour
of total output as all inputs are varied and
is a long run concept.”
• “The term returns to scale refers to the
changes in output as all factors change by
some proportion.”
1. Return to scale
2. Isoquants and returns to scale.
• CONTINUED.....

• Fig. shows that 10% increase in all factor

inputs causes 15% increase in output.
Likewise, 15% increase in factor inputs causes
25% increase in output.
• Thus, any percentage increase in inputs is
causing a greater percentage increase in
output. Increasing returns to scale are thus
operative.
• CONTINUED.....

 Increasing returns to scale occurs when a given

percentage increase in all factor inputs (in some
constant ratio)causes proportionately greater
increase in output.

• The main causes of its operation is that when scale

of production is increased then due to indivisibility
of factors such as labour, tools, implements and
machines, division of labour and specialization and
many types of economies are available.
• CONTINUED.....

• The Fig. shows that 10% increase in all factor inputs

causes 10% increase in output. Likewise, 20%
increase in inputs causes 20% increase in output.
• Thus, any percentage increase in output is matched
with equal percentage increase in output.
• OQ line accordingly, forms a 45° angle from the
origin, indicating the occurrence of constant returns
to scale.
• CONTINUED.....

 Constant returns to scale occurs when a given

percentage increase in all factor inputs (in
some constant ratio)causes equal percentage
increase in output.{Forms a 45o angle from the
origin}

• This situation arises, when after reaching a

certain level of production, economies of scale
are counter balanced by diseconomies of scale.
• CONTINUED.....

• The Fig. shows that 15% increase in all factor

inputs causes only 10% increase in output.
Likewise, 25% increase in factor inputs causes
only 15% increase in output.

• Returns to scale are thus diminishing.

• CONTINUED.....

 Diminishing returns to scale occurs when a

given percentage increase in all factor inputs
(in some constant ratio)causes proportionately
lesser increase in output.

• The main causes of its operation is that

diseconomies out weight economies of scale.
 Isoquants and returns to scale :
• We know that returns to scale refers to the
behaviour of output in response to change in the
scale of operation of a firm when all factor inputs are
changed in some constant proportion.
 Assumptions
1. Two factors of production
2. Constant technique
3. Divisible factor
4. Possibility of technical substitution
5. Efficient combination
• CONTINUED.....

• As shown in Fig. Units of labour and capital

are doubled from 2 unit to 4 units and output
more than doubles from 50 units to 120 units.

• Increasing returns to scale are also called

economies of scale.
• CONTINUED.....

 Increasing returns to scale refers to a

situation in which output increased by a
greater proportion than increase in factor
inputs.

• Under increasing returns to scale, doubling of

resources more than doubles the level of
output.
• CONTINUED.....

• Fig. shows that by doubling the quantity of

factors used in production, the producer is
unable to double the output. There are
diminishing returns to scale.

• The diminishing returns to scale are due to

diseconomies of scale.
• CONTINUED.....

 Diminishing returns to scale refers to a

situation in which output increased in lesser
proportion than increase in factor inputs.

• If a given change in factor inputs results into a

proportionately smaller changes in output, it
is a case of diminishing returns to scale.
• CONTINUED.....

• As shown in Fig. Units of labour and capital

are doubled from 2 unit to 4 units and output
more than doubles from 50 units to 100 units.

• Here the inputs and outputs Are increasing in

the same proportion.
• CONTINUED.....

 Constant returns to scale refers to a situation

in which expansion in output happens to just
proportionate to the expansion in factor
inputs.

• Constant returns to scale means that the size

of inputs and the size of the output increases
in the same proportion.