Theory of Production

1
 What is Production ?

It is the TRANSFORMATION of ??

Goods Service
UTILITY of a good - Tangible or Intangible

Form or STRUCTURAL utility

Place or SPATIAL utility
Time or TEMPORAL utility

2
What is Production ? contd.

Form Place Time

1 2

3
 

3
 TPP, APP and MPP

TPP: Total Physical Product

APP: Average Physical Product

MPP: Marginal Physical Product

 Given MPP → Calculation of TPP and APP

1st Calculate TPP

TPP1 = MPP1  
OR
TPP2 = MPP1 + MPP2
TPP3 = MPP1 + MPP2 + MPP3
TPPn = MPP1 + MPP2 + … + MPPn

Then Calculate APP

5
 Given APP → Calculation of TPP and MPP

1st Calculate TPP

TPP1 = (APP1 )(Q1)
TPP2 = (APP2 )(Q2)
TPPn = (APPn )(Qn)

Then Calculate MPP  

MPP1 = TPP1
OR
MPP2 = TPP2 – TPP1
MPPn = TPPn – TPP(n – 1 )

6
 Given TPP → Calculation of APP and MPP
1st Calculate APP Next Calculate MPP
 
MPP1 = TPP1  
MPP2 = TPP2 – TPP1 OR

 
MPPn = TPPn – TPP(n – 1 )

OR

1st Calculate MPP Next Calculate APP

MPP1 = TPP1  
MPP2 = TPP2 – TPP1
 
MPPn = TPPn – TPP(n – 1 )
 
OR

7
 Calculation of TPP & APP Given MPP
QL TPP APP MPP
1 50 50/1 = 50 50
2 50 + 60 = 110 110/2 = 55 60
3 110 + 70 = 180 180/3 = 60 70
4 180 + 80 = 260 260/4 = 65 80
5 260 + 60 = 320 360/5 = 64 60
6 320 + 40 = 360 360/6 = 60 40
7 360 + 00 = 360 360/7 = 51 0
8 360 + (- 10) = 350 350/8 = 44 -10
9 350 + (- 20) = 330 330/9 = 37 -20
10 330 + (- 30) = 300 300/10 = 30 -30
8
Calculation of MPP Given TPP
QL TPP APP MPP
1 50 50 50
2 110 55 110 – 50 = 60
3 180 60 180 - 110 = 70
4 260 65 260 – 180 = 80
5 320 64 320 – 260 = 60
6 360 60 360 – 320 = 40
7 360 52 360 – 360 = 0
8 350 44 350 – 360 = -10
9 330 37 330 - 350 = -20
10 300 30 300 – 330 = -30
9
Schedule for TPP, APP and MPP
QL TPP APP MPP
1 50 50 50
2 110 55 60
3 180 60 70
4 260 65 80
5 320 64 60
6 360 60 40
7 360 51 0
8 350 44 -10
9 330 37 -20
10 300 30 -30

10
TPP Stage 3
Stage 1 Stage 2

TPP
Fixed Factor
Exhibits Fixed Factor Fixed Factor
Mechanical Exhibits Exhibits
‘FRESHNESS Mechanical Mechanical
’ ‘FATIGUE’ ‘EXHAUSTION’

QL

11
 The Law of Variable Proportions

TPP Stage 1 Stage 2 Stage 3

MPP

TPP
Fixed Factor Exhibits Fixed Factor Fixed Factor Exhibits
Mechanical Exhibits Mechanical
‘FRESHNESS’ Mechanical ‘EXHAUSTION’
‘FATIGUE’

QL
MPP
12
 The Law of Variable Proportions

QL TPP APP MPP

1 50 50 50
2 110 55 60
3 180 60 70
4 260 65 80
5 320 64 60
6 360 60 40
7 360 51 0
8 350 44 -10
9 330 37 -20
10 300 30 -30
13
APP and MPP Curves
The Law of Variable Proportions

14
 Isoquants Analysis
Cap

Cap

B
IQ3 ; 30

IQ2 ; 20
A
IQ ; 10 IQ1 ; 10

Lab Lab
An Isoquant Isoquant Map

15
Isoquants Analysis (contd.)

Cap
Factor Cost Line

F3

F2

F1

C1 C2 C3 Lab

16
Isoquants Analysis (contd.)

Production Equilibrium
Cap

F
E

IQ2
IQ1
B
IQ0

C Lab

17
Isoquants Analysis (contd.)

Cap
F3
Expansionary Path

IQ3,30
F2
IQ2,20
E3
F1 IQ1,10
E2

E1

C1 C2 C3 Lab

18
Isoquants Analysis (contd.) Different Expansionary Paths
Cap

EP2

EP1

Lab

19
Isoquants Analysis (contd.) Expansionary Path showing Labour Intensity
Cap

EP1

Lab

20
Isoquants Analysis (contd.) Expansionary Path showing Capital Intensity
Cap

EP2

Lab

21
 INCREASING R.S. Cap
DECREASING R.S.
Cap
DECREASING R.S. INCREASING R.S.
K5 E5

K5
E5  
  K4 E4
K4 E4
  K3 E3
 
  K2 E2 K3 E3
 
  K2 E2
K1 E1   K1 E1

L1 L2 L3 L4 L5 Lab L1 L2 L3 L4 L5 Lab
               
Cap
E5
Laws of Returns K5
  E4
to Scale K4
E3
 K
 K
3

E2 CONSTANT
2

E1
Returns to Scale
 K 1

L1 L2 L3 L4 L5 22
Lab
 Laws of Returns to Scale
Cap

??
?
RS
D
? ?
to ?
RS
S I
IR
to
RS
D

Lab
23
Laws of Returns to Scale (Contd.)

1st Mover Advantages Loss of 1st Mover Advantages

a. Product backfires
1. Lack of rivalry
b. Increased rivalry
2. Sole access to resources
c. Resource scarcity sets in
3. Novelty value = control on SS
d. Increasing input cost
4. IPR protection = control on SS e. Price rises and demand falls

5. Customer acquisition & retention f. Profitability reduces

6. Brand recognition g. Tech obsolescence sets

7. Price setting (inputs & outputs) h. Govt reduces patronages

i. Opportunity cost
8. High govt. patronage
j. Increased selling costs
9. Better financial access
k. Threat of Subs / versions
 Laws of Returns to Scale
Cap

E9

? E8
??
RS
D E7
? ?
to E6 ?
RS
S I
IR E4
E5
E3 to
E2 S
DR
E1

Lab

25
 t 4
Laws of Returns to Scale (Contd.) e n
Cap e gm
S

3
e nt
g m
Se

2
ent
egm
S

nt1
e
egm
S

Lab

26
Cap Laws of Returns to Scale (Contd.)
en t4
Segm

nt3 Schumpeter
g me
Se Innovation = Creative Destruction
1. New products, new versions of the old product
2. New methods of production
3. News raw materials and new sources of raw
material
2
nt

4. New markets
me

5. New methods of business / financing

g
Se

en t1
Se gm

Lab

27
 Laws of Returns to Scale (Contd.) Cap

Cap

E9

E8
Lab

E7
Thi
s c ou
ld r
E6 e p.
any
E5 s e gm
ent
E4
E3
E2

E1

Lab