Production

Production

Production is result of co-operation of four factors

of production viz., land, labour, capital and
organization.

Producer combines all four factors of production in

a technical proportion to maximize production at
minimum cost by means of best combination of
factors of production
 Production Function

Production function refers to functional

relationship between quantity of a good
produced (output) and factors of production
(inputs).

Production function is purely a technical relation

which connects factor inputs and output.
 Production Function
Production function is an indicator of physical
relationship between inputs and output of a firm.

Production function is for a definite period

It shows flow of inputs resulting into a flow of output
during some time.

Production function of a firm depends on state of

technology.

With every development in technology production

function of firm undergoes a change.
 Production Function
Mathematically, relationship between inputs and outputs may be expressed
as:

Q = f( L, C, N )

Where Q = Quantity of output

L = Labour
C = Capital
N = Land.

Level of output (Q), depends on the quantities of different inputs (L, C, N)

available to the firm.

In simplest case, where there are only two inputs, labour (L) and capital (C)
and one output (Q), production function becomes.
Q =f (L, C)
 Features of Production Function

1. Substitutability:
Factors of production or inputs are substitutes of one another which
make it possible to vary total output by changing quantity of one or a
few inputs, while quantities of all other inputs are held constant.
It is substitutability of factors of production that gives rise to law of
variable proportions.

2. Complementarity:
Factors of production are also complementary to one another, that is,
two or more inputs are to be used together as nothing will be produced if
quantity of either of inputs used in production process is zero.

Principles of returns to scale is another manifestation of complementarity

of inputs as it reveals that quantity of all inputs are to be increased
simultaneously in order to attain a higher scale of total output.
 Features of Production Function
3. Specificity:
It reveals that inputs are specific to the production of a
particular product.
Machines and equipment’s, specialized workers and
raw materials are a few examples of specificity of
factors of production.
Specificity may not be complete as factors may be used
for production of other commodities too.
Thus in production process none of factors can be
ignored and in some cases ignorance to even slightest
extent is not possible if factors are perfectly specific.
 Features of Production Function
Production involves time; hence, the way inputs are
combined is determined to a large extent by time period
under consideration.
Greater the time period, greater freedom the producer
has to vary quantities of various inputs used in
production process.

In production function, variation in total output by

varying quantities of all inputs is possible only in long run
whereas
variation in total output by varying quantity of some
input may be possible even in short run.
 Features of Production Function

A production function is a mathematical and

graphical way to
measure the efficiency of production by
considering relationships between two or more
variables /factors( raw materials and labor ) that are
relevant when producing a good or service.

Once a business has determined factors for

production, it can begin building production function
 Cost-Output Relationship

A proper understanding of nature and behavior of costs is necessary for

regulation and control of cost of production.
Cost of production depends on money forces and an understanding of
functional relationship of cost to various forces will help us to take various
decisions.
Output is an important factor, which influences cost.

Cost-output relationship plays an important role in determining optimum level

of production.
Knowledge of cost-output relation helps manager in cost control, profit
prediction, pricing, promotion etc.
Relation between cost and its determinants is technically described as cost
function.
C= f (S, O, P, T ….)
Where;
C= Cost (Unit or total cost), S= Size of plant/scale of production
O= Output level, P= Prices of inputs, T= Technology
 Supply analysis

• Production and costs

• Law of variable proportions-
• Law of supply and elasticity of
supply-
• Cost and cost functions –
determinants of costs-
• Break even analysis