Economics –

Production Function
Production Function
Factors of Production
Production Function

 Production is
transformation of
inputs into output.

 Production Function is
technological
relationship between
input and output of
goods.
Production Function
 Production function specifies the maximum
output with the given input or the minimum
amount of input required to attain the desired
level of output.

 Production Function is stated with respect to

technology.

 It includes technically efficient methods of

production.
Short Run and Long Run

Production function can be studied in two

phases
 Short run time period
 Long run time period

 Short run time period – it is the period in

which output can be changed by changing
only variable factors of production.

 Long run time period – it is the period in

which output can be changed by changing
all the factors of production.
Variable factors and Fixed factors

Production is dependent on combination of

various factors of production. They can be
classified into
 Variable factors
 Fixed factors

 Variable factors – the factors of production

which can be changed in the short run

 Fixed factors – the factors of production which

cannot be changed in the short run
Product/Output

Product or output is the volume of goods

produced by a firm or an industry during a
specified period of time

Product
Total Marginal Average
Product Product Product
Total Product(TP)

Total product refers to the total quantity of

goods produced by a firm during a given
period of time with the given input.

 It is the sum of all the output produced.

 It is also termed as Total Physical Product
(TPP) or Total Output

 TP = ⅀Product produced = ⅀MP

Average Product(AP)

Average product refers to the output per unit

of variable input.

 It is obtained by diving Total product with

the units of variable input used.
 It is also termed as Average Physical
Product (APP) or Average Output

 AP =
Marginal Product(MP)

Marginal product refers to the addition to the total

product when one more unit of variable factor is
employed.

 It is also termed as Marginal Physical Product

(MPP) or Marginal Output

 MPn = TPn – TPn-1

 MP = =
Law of Variable Proportions

Law of variable proportion states that as

the quantity of only one variable input is
increased, keeping the other factors fixed,
total product initially increases at an
increasing return, then at decreasing return
and finally at a negative return.

 It is also termed as Law of Returns,

Law of Returns to Factor or Returns to
Variable factor
Law of Variable Proportions
Assumptions of the law:
 It is applicable in the short run as fixed and
variable factors are involved.
 Different units of variable factor can be combined
with fixed factor
 It applies to production only
 Change in output due to change in variable factor
can be measured.
 Factors of production become imperfect
substitutes beyond a certain limit.
 State of technology is constant
 All the variable factors are equally efficient
Law of Variable Proportions
Fixed Factor Variable Factor TP MP Phase
(Land) (Labour)
1 0 0 -
1 1 2 2 Phase – I
Increasing returns to factor
1 2 6 4
1 3 12 6
1 4 16 4 Phase – II
1 5 18 2 Diminishing returns to
factor
1 6 18 0
1 7 14 -4 Phase – III
1 8 8 -6 Negative returns to factor

In the above schedule, land is taken as fixed factor and Labour as Variable factor
Law of Variable Proportions

In the diagram, units of variable factor are

presented on X-axis and product on Y-axis.

The diagram showcases increase in TP at an

increasing rate in Phase – I

In Phase – II, TP increases at a decreasing rate

and MP falls. MP becomes zero at the end of
this phase and TP reaches its maximum point

In Phase – III, TP starts decreasing and MP

becomes negative.
Phases of Law of Variable Proportions
 Phase – I: Increasing returns to factor
In this phase the TP increases at an increasing
rate and MP of each variable factor also rises.

This happens because

 Better Utilisation of fixed factor
 Increased efficiency of variable factor –
higher degree of specialisation
 Optimum level of combination of variable
and fixed factor due to indivisibility of fixed
factor.
Phases of Law of Variable Proportions
 Phase – II: Diminishing returns to factor
In this phase TP increases at a diminishing rate
as every additional variable factor adds less to
the total volume. MP falls and finally becomes
zero.

This happens because:

 After Optimum Utilisation of fixed factor,
the returns start to decrease.
 Fixed and variable factors are imperfect
substitutes of each other. They cannot
replace each other leading to diminishing
returns
Phases of Law of Variable Proportions
 Phase – III: Negative returns to factor
In this phase TP starts to decline and MP
becomes negative.

This happens because

 Variable input has become too large in
relation to fixed factor.
 Limitation of fixed factor
 Poor coordination between fixed and
variable factors.
 Decrease in efficiency of variable factor.
Law of Diminishing Returns

Law of diminishing returns states that as

more and more units of variable factors
are employed with fixed factor, then
marginal product of the variable factor
falls.

 It is also termed as Law of

Diminishing Marginal Product.
Law of Diminishing Returns
Fixed Factor Variable Factor TP MP
1 1 10 10
1 2 18 8
1 3 24 6
1 4 28 4
1 5 30 2
1 6 30 0
1 7 28 -2
1 8 26 -2

As showcased by the schedule and the diagram, MP

falls when more and more units of variable factor are
employed with fixed factor.
This law considers only the falling phases of MP and
not increasing.
Relationship between TP and MP
Fixed Factor Variable Factor TP MP
The relationship between TP and MP 1 0 0 -
1 1 10 10
 As long as TP increases at an 1 2 30 20
increasing rate, MP also increases 1 3 45 15
1 4 52 7
 When TP increases at diminishing rate, 1 5 52 0
MP decreases. 1 6 48 -4

 When TP reaches its maximum point,

MP becomes zero.

 When TP starts decreasing MP

becomes negative
Relationship between AP and MP
Fixed Factor Variable Factor TP AP MP
1 0 0 - -
The relationship between AP and MP
1 1 10 10 10

 As long as MP is more than AP, AP 1 2 30 15 20

increases. 1 3 45 15 15
1 4 52 13 7
 When MP is equal to AP, AP is at its 1 5 52 10.4 0
maximum point. 1 6 48 8 -4

 When MP is less than AP, AP falls.

 Thereafter both AP and MP fall, but

MP falls at a faster rate than AP.

 MP becomes negative while AP

remains positive.
Production Function - Formulae
 TP = ⅀Product produced = ⅀MP

 AP =

 MPn = TPn – TPn-1

 MP = =
Practicals on TP, AP and MP
1. Calculate Average Product (AP) and Marginal Product (MP)
Variable Factor (Units) 1 2 3 4 5 6
TP (Units) 8 16 24 29 29 25

Sol. AP = ;
MPn = TPn – TPn-1

Variable Factor (Units) TP (Units) AP MP

1 8 8 8
2 16 8 8
3 24 8 8
4 29 7.25 5
5 29 5.80 0
6 25 4.16 -4
2. Calculate Average Product (AP) and Marginal Product (MP)
Variable Factor (Units) 0 1 2 3 4 5 6 7
TP (Units) 0 3 8 12 15 17 17 16

Sol. AP = ;
MPn = TPn – TPn-1

Variable Factor (Units) TP (Units) AP MP

0 0 - -
1 3 3 3
2 8 4 5
3 12 4 4
4 15 3.75 3
5 17 3.40 2
6 17 2.83 0
7 16 2.28 -1
3. Calculate Average Product (AP) and Total Product (TP)
Variable Factor (Units) 1 2 3 4 5 6 7
MP (Units) 20 16 12 8 4 0 -4

Sol. AP = ;
TP = ⅀Product produced = ⅀MP

Variable Factor (Units) MP TP AP

1 20 20 20
2 16 36 18
3 12 48 16
4 8 56 14
5 4 60 12
6 0 60 10
7 -4 56 8
4. Calculate the values of TP and AP from the following data
Variable Factor (Units) 1 2 3 4 5
MP (Units) 10 11 10 9 8

Sol. AP = ;

TP = ⅀Product produced = ⅀MP

Variable Factor (Units) MP TP AP

1 10 10 10
2 11 21 10.5
3 10 31 10.33
4 9 40 10
5 8 48 9.60
5. Calculate the values of TP and AP
Variable Factor (Units) 1 2 3 4 5 6
MP (Units) 10 12 14 12 7 5

Sol. AP = ;

TP = ⅀Product produced = ⅀MP

Variable Factor (Units) MP TP AP

1 10 10 10
2 12 22 11
3 14 36 12
4 12 48 12
5 7 55 11
6 5 60 10
6. Compute TP and MP
Variable Factor (Units) 1 2 3 4 5
AP (Units) 50 45 40 35 30

Sol. TP = AP x Variable factor

TP = ⅀Product produced = ⅀MP

Variable Factor (Units) AP TP MP

1 50 50 50
2 45 90 40
3 40 120 30
4 35 140 20
5 30 150 10
7. Compute TP and MP
Variable Factor (Units) 1 2 3 4 5 6
AP (Units) 50 48 45 42 39 35

Sol. TP = AP x Variable factor

TP = ⅀Product produced = ⅀MP

Variable Factor (Units) AP TP MP

1 50 50 50
2 48 96 46
3 45 135 39
4 42 168 33
5 39 195 27
6 35 210 15
8. Find the missing values from the following table:
Variable Factor (Units) 0 1 2 3 4 5
TP (Units) 10 24
AP (Units) 6 5
MP (Units) 4

Sol. AP = ; TP = ⅀MP
MPn = TPn – TPn-1;

Variable Factor (Units) TP (Units) AP MP

0 - - -
1 4 4 4
2 10 5 6
3 18 6 8
4 24 6 6
5 24 5 1
9. Complete the following table:
Variable Factor (Units) 1 2 3 4 5 6
AP (Units) 16 20 18 14
MP (Units) 20 8

Sol. AP = ; TP = ⅀MP
MPn = TPn – TPn-1;

Variable Factor (Units) AP MP TP

1 16 16 16
2 20 24 40
3 20 20 60
4 18 12 72
5 16 8 80
6 14 4 84
10. Complete the following schedule:
Variable Factor (Units) 1 2 3 4
TPP 100 480
APP 140
MPP 140

Sol. AP = ; TP = ⅀MP
MPn = TPn – TPn-1;

Variable Factor (Units) TPP APP MPP

1 100 100 100
2 240 120 140
3 420 140 180
4 480 120 60
11. Calculate MP of the variable factor and identify the various phases of change in the
total product from the following schedule
Variable Factor (Units) 0 1 2 3 4 5 6
TP (Units) 0 10 28 45 52 52 48

Sol. MPn = TPn – TPn-1

Variable Factor (Units) TP MP Phase

0 0 - Phase – I
1 10 10 Increasing returns
2 28 18
3 45 17 Phase – II
4 52 7 Diminishing returns
5 52 0
6 48 -4 Phase – III
Negative returns
12. Identify the three phases of law of variable proportion from the following schedule
Unit of Labour 1 2 3 4 5
TP (Units) 20 50 70 80 60

Sol. MPn = TPn – TPn-1

Variable Factor (Units) TP MP Phase

1 20 20 Phase – I
2 50 30
3 70 20 Phase – II
4 80 10
5 60 -20 Phase – III
13. From the following table, find out the phase during which there are increasing
returns to factor. Give reasons for your answer.
Unit of variable factor 1 2 3 4 5
AP (Units) 10 12 14 14.5 14

Sol. MPn = TPn – TPn-1

Variable Factor (Units) AP TP MP Phase

1 10 10 10 Increasing
2 12 24 14 returns – as MP
is increasing
3 14 42 18
4 14.5 58 16
5 14 70 12
14. Identify the three phases of law of variable proportions. Give reasons
Variable Input (Units) 1 2 3 4 5
TP (Units) 5 11 15 17 15

Sol. MPn = TPn – TPn-1

Variable Factor (Units) TP MP Phase

1 5
2 11
3 15
4 17
5 15
5 Phase – I
6 Increasing MP
4 Phase – II
2 Decreasing MP
-2 Phase – III
Negative MP
 Revise the lesson
 Differentiate between the following
 short run and long run
 Fixed factor and Variable factor