BE UNIT 3.1 updated with market structure concepts.pptx

BE UNIT 3.1 updated with market structure concepts

1. PRODUCTION FUNCTION Unit - 3

2. Q. What is production? Production is an important economic activity which satisfies the want and needs of the people. Production is a process of transforming inputs into outputs. So, production means the creation of goods and services. It is done to satisfy human wants. Thus, production is a process of transformation . Production

3. In simple words, production function refers to the functional relationship between input (raw materials) used and the resulting output (desire goods). Input Out p u t Production function

4. Production function is that function which defines the maximum amount of that can be produced with a given set of inputs. - Michael R Baye

5. Important facts about production function A Production function is expressed with reference to a particular period of time. It expresses a physical relation because both input and output are expressed in physical terms. Production function describes a purely technological relation because what can be produced from a given amount of input depends upon the state of technology.

6. Prod u ction function It shows the technical relation between input and output Q = f ( Ld, L, C,M,T,t) Where: Q- Quantity of the output produced Ld- land and building L- labour units C -Capital employed M - materials T - Technology t - time period of production Basic function is Q = f ( L, C, M )

7. USES OF PRODUCTION FUNCTION it will help to obtain maximum output It is very useful in taking longrun decision Help the producer to determine whether employing variable inputs/costs are profitable It is help full to calculate the least cost input combination for a given out put

8. The nature of production function i.e. how output varies with change in the quantity of input depends upon the time period allowed for the adjustment of inputs. On the basis of production function classified into two types: Short run production function . Long run production function. TYPE OF PRODUCTION FUNCTION

9. SHORT RUN V / S LONG RUN Short run Plant size is fixed , labour is variable. Long run T o increase production firms increase labour but cannot expand their plant.

10. Short run production functions :- At what rate the output of a good changes when only one input is varied and other input used in production of that good are kept fixed. The resulting behavior of output is termed as return to a factor . Long run production functions :- At what rate of output of a good change when all the input used in production of that good are changes simultaneously and in the same proportion. The resulting behavior of output is termed as return to scale .

11. T WO TYPES OF FACTOR INPU T S Fixed Inputs:- Fixed input are those factor the quantity of which remains constant irrespective of the level of output produced by a firms. For e.x land,building,machines,tools,equipment,superior, type of labour,top management etc. Variable inputs:- Variable input are those factor the quantity of which varies with variations in the level of output produced by a firms. For e.x raw material, power fuel, transport labour etc.

12. Cobb–Douglas function: The Cobb–Douglas functional form of production functions is widely used to represent the relationship of an output and two inputs.

13. Concept of production Total Produ c tion Average prod u ction Marginal prod u ction It is the sum total of all out put produced in a given period of tine It is the output produced per unit of labour It is the change in total production as a result of change in quantity of labour T P = AP X Ql AP = TP Ql MP = TP Ql

14. T O T AL , A VERAG E , AND MAR G INAL PR O DUCT SCHEDULE CONSIDER A SMALL SANDWICH SHOP NO.OF WORKERS PRODUCT (L) T O T AL PROD U CT (TP) AVERAGE PRODUCT (AP) MARGINAL PRODUCT (MP) ------ ------ ------ 1 100 100 100 2 220 110 120 1st 3 360 120 140 4 520 130 160 5 650 130 130 6 750 125 100 7 840 120 90 2 sd 8 880 110 40 9 880 97.7 10 830 83 50 3rd 11 770 77 60

15. GRAPH OF LAW VARIABL PROPORTION

16. THREE STAGES OF PRODUCTION STAGE:1 Average product rising. STAGE:2 Average product declining. (but marginal product positive ) STAGE:3 Marginal product is negative or total product is declining.

17. RELATIONSHIP BETWEEN DIFFERENT PRODUCT Between AP and MP when MP > AP,AP,increases. when MP<AP,AP,decreases. when MP=AP,AP is maximum. Between TP and MP w h e n T P i n crea s es increases. a t increas i ng rate , MP rate MP w h e n T P i n c r eases a t decreasing decreases. when TP maximum, MP is 0. when TP decreases,MP is negative.

18. Law of Diminishing Returns/ Law of Variable Proportion Law of Return to Scale

19. L AW OF D IMINISHING R ETURNS / L AW OF V ARIABLE P ROPORTION Law of diminishing returns explains that when more and more units of a variable input are employed on a given quantity of fixed inputs, the total output may initially increase at increasing rate and then at a constant rate, but it will eventually increase at diminishing rates. In other words, the total output initially increases with an increase in variable input at given quantity of fixed inputs, but it starts decreasing after a point of time.

20. The assumptions made for the application of law of diminishing returns are as follows: Assumes labour as an only variable input, while capital is constant Assumes labour to be homogeneous Assumes that state of technology is given Assumes that input prices are given

21. LAW OF RETURN TO SCALE The law of returns to scale describes the relationship between variable inputs and output when all the inputs, or factors are increased in the same proportion. The law of returns to scale analysis the effects of scale on the level of output. Here we find out in what proportions the output changes when there is proportionate change in the quantities of all inputs. The answer to this question helps a firm to determine its scale or size in the long run.

22. Three kinds types of returns to scale are seen : Increasing Returns to Scale: If the output of a firm increases more than in proportion to an equal percentage increase in all inputs, the production is said to exhibit increasing returns to scale. For example, if the amount of inputs are doubled and the output increases by more than double, it is said to be an increasing returns to scale. When there is an increase in the scale of production, it leads to lower average cost per unit produced as the firm enjoys economies of scale. (2)Constant Returns to Scale: When all inputs are increased by a certain percentage, the output increases by the same percentage, the production function is said to exhibit constant returns to scale.

23. For example, if a firm doubles inputs, it doubles output. In case, it triples output. The constant scale of production has no effect on average cost per unit produced. (3) Diminishing Returns to Scale: The term 'diminishing' returns to scale refers to scale where output increases in a smaller proportion than the increase in all inputs. For example, if a firm increases inputs by 100% but the output decreases by less than 100%, the firm is said to exhibit decreasing returns to scale. In case of decreasing returns to scale, the firm faces diseconomies of scale. The firm's scale of production leads to higher average cost per unit produced.

24. ISO QUANT Production function with two variable inputs or equal product curves According to Ferguson, “ An isoquant is a curve showing all possible combinations of inputs physically capable of producing a given level of output” An isoquant represents all those combinations of inputs which are capable of producing the same level of output An isoquant is also known as Production-Indifference curve An isoquant is also known as Production-Indifference curve

25. Various combination of X and Y to produce a given level of output Each of the factor combinations A,B,C,D and E represents the same level of production
Say 100 units.

26. ISO QUANT A firm uses one unit of labour and one unit of capital, point a, it produces 1 unit of quantity as is shown on the q = 1 isoquant. When the firm doubles its outputs by using 2 units of labour and 2 units of capital, it produces more than double from q = 1 to q = 3. So the production function has increasing returns to scale in this range. Another output from quantity 3 to quantity 6. At the last doubling point c to point d, the production function has decreasing returns to scale. The doubling of output from 4 units of input, causes output to increase from 6 to 8 units increases of two units only.

27. Properties of Iso quants Isoquants are Negatively Sloped : They normally slope from left to right means they are negatively sloped . The reason is when the quantity of one factor is reduced , the same level of output can be achieved only when the quantity of other is increased Higher Isoquants Represents Larger Output : Higher isoquant is one that is further from he point of origin. It represents a larger output hat is obtained by using either same amount of one factor and the greater amount of both the factors No Two Isoquants Intersect or Touch each other : Isoquant do no intersect or touch each other because they represent different level of output Isoquants are convex to the origin : In most production processes the factors of production have substituability. Labour can be substituted for capital and ice versa .
however the rate at which one factor is substituted for the other in production process i.e marginal rate of technical substitution (MRTS) also tends to fall

28. ISO-COST / EQUAL-COST LINE :- Iso -Cost line represent the price of the factor. It shows various combination of two factors which the firm can buy with, given outlay. Suppose a firm has Rs.1000 to spend on the two factors X and Y. If the price of factor X is Rs.10 and that of Y is Rs.20, the firm can spend its outlay on X and Y or it can spend the entire outlay on Y and buy 50 units of it with zero units of Y or it can spend the entire outlay on Y and buy 50 units of it with zero units of X factor. In between, it can have any combination of X and Y.

29. One can show iso -cost line diagrammatically also. The X-axis shows the units of factor X and Y-axis the units of factor Y. when entire Rs.1000 are spend on factor X we get OB and when entire amount is spent on factor Y we get OA. The straight line AB which joins point A and B will pass through all combinations of factors X and Y which the firms can buy with outlay of Rs.1000. The line AB is called Iso -cost line .

30. CONCLUSION Production function is simply a catalogue of production possibilities. It is an engineering concept and since money prices not appear in it, it merely depicts the physical relationship between the output and inputs.

31. Economies of scale: Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods.

32. Economies of Bi- products

33. INNOVATIONS AND GLOBAL COMPETITIVENESS: