Production Function

• Production refers to any activity where- in resources

are transformed into goods and services
It results in value addition
The product created may be used for immediate
consumption or as input for creation of some other
product
Major classification of factors of production are: i)Land
(includes all resources available in nature- water, sun
energy, minerals, fossil fuel etc.) ii) Labour(physical,
skills) iii) Capital ( machinery, building etc.)
iv) Technology v) Management organisation.
 Firm
• A firm is an organisation created for the
purchase of resources, marshalling them to
produce goods and services and sell them in
the market.
• All above processes have associated risks.
• The entrepreneur who has willingly taken the
above decisions with risks associated is
rewarded in the form of profits( losses)
 Efficient Production
• A method of production is stated to be
efficient if under the best technology in vogue
and with given levels of inputs it is not
possible to obtain a higher level of output.
 Production Function
• A function indicating the maximum possible quantities of
output achievable with varying levels of inputs employed
in certain combination and under given the technology of
production.
• The general form of production function :Q=f(xi) x1,x2,x3..
are factors of production.
• A two variable production function is Q= f(L,K) where L=
labour and K= capital (other factors of production of
production remaining the same)
• P.H. Douglas production function Q=A La K (1-a) where A
and a are constants, L and K are any two factors of
production.
 Short run & Long run Production
• The short run is that period of time over which
the input of at least one factor of production can
be varied. The factors that can be varied in the
short run are labour, raw materials, electricity etc
and these are generally referred to as variable
factors. The factors that cannot be easily varied in
the short run are land, machinery, buildings,
production technology. These are referred to as
fixed factors.
• Long run is that period of time in which variations
in all factors of production could be effected.
 Laws of Production
• The quantity of output is determined by the quantities of various
inputs employed in different combinations (mix).A point to be
noted here is that some of the inputs are fixed and variations could
be effected in the short run only in respect of some.
• When there is increase or decrease in the employment of variable
inputs, outputs may or may not increase in the same proportion.
The out put may increase more than proportionately in case the
change leads to better exploitation of some of the inputs that are
under utilised earlier. Out put increase may be less than
proportional in case it is affecting the best possible utilisation of any
particular input in the mix.
• Above would be the case irrespective of whether the increase
/decrease in the variable input is in the entire combine or only in
certain inputs in it.
 Total, Average and Marginal Product
• Total product (TP) refers to the number of units created under
production effort.
• If it is possible to indicate the relationship between the number
units employed of a particular input factor and of total product, a
graph drawn between the two is called product curve with
reference to the input concerned.
• Average Product(AP) is total product/ number units of input factor
concerned.
• Marginal Product (MP) is the addition to the total product as a
result of the last unit of the input factor employed.
• Total product increases at faster pace when MP>AP, as more and
more factor is employed the growth in TP slows down in phase
where MP<AP reaches stagnation point Where MP=0. If increased
employment is continued beyond that point it may even show a
declining trend MP is negative.
 ISOQUANTS
• Isoquants are contour lines that trace the locus of same outputs. An
isoquant represents the combination of inputs that can produce the
same quantity of output. So the producers are indifferent in choice
of combination of inputs on the same Isoquant line.
• Properties of Isoquants: i) It is a down slopping to the right curve. ii)
A higher isoquant represents a higher level of output. iii) No two
Isoquants intersect. iv) An Isoquant is convex to the origin. As one
starts moving down the curve smaller unit of one input say capital
would required for substituting a given unit of another input say
labour to keep the output level constant. This is due to declining
marginal rate of technical substitution. It also implies that it
becomes more difficult to substitute one input factor with another
as one moves along an Isoquant.