Production Function.pptx A production function .

A production function shows the technical relationship between the inputs and outputs.
Q=f(L,K)
 
Assumptions of production function are:
State of technology is assumed to be constant. This is because, if technology becomes variable, then production function would show shifts implying more output using same level of inputs.
Production function is with reference to a particular period of time.

1. PRODUCTION FUNCTION

2. Production function A production function shows the technical relationship between the inputs and outputs. Q=f(L,K)   Assumptions of production function are: State of technology is assumed to be constant. This is because, if technology becomes variable, then production function would show shifts implying more output using same level of inputs. Production function is with reference to a particular period of time.

3. Types of Product TP = Total output produced AP= Average Product : per unit production(TP/L) MP= Marginal Product: Addition in total product with per unit increase in input (DTP/DL)

4. Types of Production Function 1 . Law of Variable Proportion/ Short Run Law/ Return to Factor: It is a short run theory in which there is at least one factor which is fixed, that is, it cannot change. Thus, this law deals with the changes in the factor proportions. Beyond a certain point, the MP of the factor would diminish. Assumptions : Tech is fixed and constant Some inputs should be kept constant Various factors can be combined to produce a product.

5. Stages of Law of Variable Proportions The stages of law of variable proportions can be defined as: Stage 1: Increasing returns to a factor Under this stage the marginal product increases, reaches maximum and starts decreasing. The stage ends where the average product reaches maximum. In this stage MP of the fixed factor is negative. Reasons for Stage 1 are: Fixed factor is in abundance. As more of variable factor is increased, the scope for efficiency increases. Indivisibility of factors: Minimum level of input must be employed due to the technological requirements.

6. Stage 2: Diminishing returns to a factor Under this stage, the marginal product decreases, average product starts falling. The stage ends when marginal product reaches zero. Reasons for Stage 2 are: Scarcity of fixed factor Indivisibility of fixed factor Imperfect substitutability of factors: This reason was given by Joan Robinson stating that elasticity of substitution is not equal to infinity.

7. Stage 3: Negative Returns to a Factor Under this stage, the marginal product of the variable factor becomes negative as a result of which the total product starts falling. Reason for Stage 3: Variable factor is in excess of fixed factor. Therefore, the most optimal stage of production is stage 2. A point to remember here is that in stage 1, the marginal product of fixed factor is negative because it is in excess of the variable factor. On the other hand, in stage 3, the marginal product of a variable factor is negative because it is in excess of the fixed factor.

8. Stage 1 Stage 2 Stage 3 5 10 15 Units TP,MP,AP Total Product Average Product Marginal Product

9. Returns to Scale It is a long run law in which all the factors are variable in nature and factor proportions do not change. All inputs will be varied by the same proportion. Stages of Returns to Scale: Constant Returns to Scale: Under this, the change in proportion of inputs is equal to the change in proportion of outputs. Isoquants are equi -distant.

10. 2.Decreasing Returns to Scale : Under this, the change in proportion of inputs is greater than the proportionate change in outputs. The distance between the isoquants keep increasing . 3.Increasing Returns to Scale : Under this, the change in proportion of inputs is less than the change in proportion in outputs. The distance between the iso quants would keep decreasing.  

11. Reasons Reasons of Increasing, Decreasing or Constant Returns to Scale are explained by the Economies of Scale. Economies of Scale(Output expansion's impact on the costs) Internal Economies of Scale(Firm Based) External Economies of Scale(Industry Based)

12. Diseconomies of Scale (Disadvantage due to expansion of output) Internal Diseconomies of Scale : Caused By Ma nagement issues Co-ordination problem Technical Failures External Diseconomies of Scale Caused by: 1. Burden on storage and transportation  Under Constant returns to scale, the economies and the diseconomies are equal to each other.

13. Source of all images Notes by Economics Harbour (3rd Edition)