Long Run

Production Function
Managerial Economics

Presented to:
Dr. Anju Verma
Presented by:
Ravi Yadav(45)
Tarun(46)
MBA General
 Contents
 Introduction
 Production Function
 Factors of Production
 Long Run Production Function
 Law of Returns to Scale
 Short Run Production Function
 Differences b/w Short Run and Long Run Production
 Conclusion
 References
 Introduction
 Any activity which creates value
is production.
 In other words, production is
transformation of inputs (such as
capital, equipment, labour, and
land etc ) into output such as
good or service .
 e.g. – transporting sand,
operating a jeweller store,
drilling for oil, cultivation, trading
and so on.
 Production Function
 Production function express the technological relationship
between physical inputs and physical output of a firm
under given technology.
 A production function may be write as follows
Where,
 Q = output (total product)
 Q = f(N, L, K, E,…..)
N (land), L(labour), K(capital),
E(entrepreneurship) , .. are the inputs.
Production Function
 Inputs (Factors) of Production
Factors of production are broadly classified as :
 Land: soil, water, forests, minerals.

 Labour: Itis supplied by the workers. Labour can be skilled as well as

unskilled, physical or intellectual.

 Capital: Wealth which is used for further production as machine/

equipment/intermediary good.

 Enterprise/Entrepreneurship: The ability and action to take risk of

collecting, coordinating, and utilizing all the factors of production for the
purpose of uncertain economic gains.
Factors of Production
 Long run production function
 In the long run, all factor-inputs can be varied. It means,
that in the long-run, we can expand or reduce the scale of
production as well. The way in which the output varies with
the changes in the scale of production is discussed in the
long-run production-functions.

 The law which states this relationship is also called returns

to scale. Since it is related to the long-period, it is called
long-run production-function.
Law of Returns to Scale
 Return to Scales
 In the long run, all factors are variable.
 The expansion of output may be achieved by varying all factor-
inputs.
 When there are changes in all factor-inputs in the same
proportion, the scale of production (or the scale of operation) also
gets changed.
 Thus, the change in scale means that all factor inputs are
changed in the same proportion.
 Return to Scales
 The law of returns to scale with its all the three stages (or
types) is shown in the following example and diagram below:
 Short Run Production Function

Its refers to that period of time, in which the installation of

new plant and machinery to increase the production level
is not possible. On the other hand, the Long-run
production function is one in which the firm has got
sufficient time to install new machinery or capital
equipment, instead of increasing the labour units.
 Differences between
Short Run and Long Run Production Function
SHORT-RUN PRODUCTION
BASIS FOR COMPARISON
FUNCTION
• Meaning • Short run production
function alludes to the time
period, in which at least one
• Law factor of production is fixed.
• Scale of Production • Law of variable proportion
• Factor Ratio • No change in scale of
production.
• Entry and Exit
• Changes
• There are barriers to entry
and the firms can shut down
but cannot fully exit.
LONG-RUN PRODUCTION
FUNCTION
• Long run production function
connotes the time period, in
which all the factors of
production are variable.
• Law of returns to scale
• Change in scale of
production.
• Does not change.
• Firms are free to enter and
exit.
 Conclusion
 Thus, the main reason for the operation of the different forms of
returns to scale is found in economies and diseconomies.
 — When economies exceed the diseconomies → the stage
of increasing returns operate.
 — When economies equal diseconomies → the stage of
constant returns to scale.
 — when diseconomies exceed the economies → stage of
diminishing returns to scale.
 References
 Investopedia.com/terms/longrun

 Keydifferences.com/difference-between-short-run-and-
long-run-production-function.html

 Theintactone.com/short-run-and-long-run-production-
function/
Thank You