Topic: PRODUCTION CONCEPTS

Presented by, GEETANJALI TIWARI ANKUR BANYAL

Production Concepts: review

INTRODUCTION
By production or act of production involves transformation of inputs and outputs. Output mean supply of which depends upon cost of production which again depends upon input price and relationship b/w input and output which is called production function.

PRODUCTION FUNCTION
The production function is the name given to the relationship b/w the rates of input of productive services and the rate of output of a product. Thus, the production function express the relationship b/w the quantity of output and the quantities of various inputs used for the production. The production function can be studied in two ways: 1)Law of Variable proportion: Where quantities of some factors is kept fixed but the other factor is varied. 2)Laws of Return to Scale: Where all quantities of all factors is varied. Production function can be algebraically expressed as: Q = f(N,L,K,T) where, Q = Quantity of output N,L,K,T = quantities of factors (inputs)

Some definitions helping in understanding the laws::

Total Physical Product: Total quantity of output produced in physical units by a firm during a period of time The change. Marginal Product: The change in total product caused as a result of one additional unit of variable factor employed in combination with fixed factors is called marginal product. M.P. = T.P. Variable factor units Average Product: It is the total product that a firm produces in a given time period divided by the quantity of a variable factor that is used to produce it. A.P. = T.P. Variable factor units Short Run: It is period of time during which at least one of the firms input cannot be varied. It is not possible to tell how long , short run will last.

Long Run: It is the period of time long enough to make all the changes that a firm wants to make within limits of existing or present production function. This is the second time span in which business decisions are made. Very Long Run: It is the period of time long enough that the whole technology can be introduced and production function itself is changed. The inputs or the factors of production can be classified intoFixed Input= are those which do not change in quantity irrespective of the level of output. Variable Input= are whose quantity changes along with a change in the output.

THE LAW OF DIMINISHING RETURNS OR THE LAW OF VARIABLE PROPORTION This law examines the production function with one factor variable, keeping the quantities of other factors fixed. In other words, it refers to the input output relation when the output is increased by varying the quantity of one input. As equal increments of one input are added; the inputs of other productive services being held, constant, beyond a certain point the resulting increments of product will decrease, i.e. the marginal product will diminish Three stages explaining are: STAGE I : Increasing Returns (1)Stage I is the segment from the origin to pt. X2 (2)At this pt., the marginal product of X equals its avg. product. (3)X2 is also the pt. at which the avg. product is maximized. (4)The production function is characterised first by increasing marginal returns to the variable factor from the origin to pt. X1 and then by diminishing marginal returns, from X1 to X2.

STAGE II Lies in X2 to X3. Avg. product of the variable factor is maximised and continues to the point at which total product is maximized and marginal product is zero. STAGE III The area beyond X3 where the total product curve starts decreasing. In this range the marginal product of the variable factor is negative.

Assumptions: 1. Constant technology. If technology changes, marginal and average product may rise instead of diminishing. 2. Short Run. The law operates in the short run because it is here that some factors are fixed and others are variable. In the long run, all factors are variable. 3. Homogeneous input. The variable input as applied unit by unit is homogeneous or identical in amount and quality. 4. It is possible to use various amounts of a variable factor on the fixed factors of production.

RETURNS TO SCALE OR LAWS OF RETURN TO SCALE

The study of changes in output when all factors of production or inputs are increased together. In other words, the study of the behaviour of output in response to changes in scale. An increase in the scale means that all inputs or factors are increased in the same proportion. The study of changes in output as a result of changes in the scale forms the subject matter of returns of scale.
Constant Returns To Scale

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The Laws of Returns To Scale

1)Law of Increasing Returns to Scale

If the increase in all factors leads to more than proportionate increase in output, returns to scale are said to be increasing. Thus, if all factors are doubled, and output increases by more than double, then the returns to scale are increasing.

2)Law of Constant Returns to Scale

If we increase all factors of production (i.e. scale) in a given proportion and the output increases in the same proportion, returns to scale are said to be constant.

3)Law of Diminishing or Decreasing Returns to Scale

If the increase in all factors leads to a less than proportionate increase in output, returns to scale are decreasing

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