8/10/2019 5 Production ,Scale and Costs Class Imp2

1/24

PRODUCTION AND

COSTS

8/10/2019 5 Production ,Scale and Costs Class Imp2

2/24

PRODUCTION FUNCTION Production function is the name given to the

relationship between the rates of input of productiveservices & the rate of output of a product. Thus the

production function expresses the relationship betweenthe quantity of output & quantities of various inputsused for production.

Production function can be studied in three ways:

1. Law of variable proportion: here quantities of somefactors is !ept fixed but the other factors are varied.

". Law of #eturn to $cale: here quantities of all factorsare varied.

%. ptimum or best combinations of inputs.

8/10/2019 5 Production ,Scale and Costs Class Imp2

3/24

Practical observation of the production functionindicates " normal relationships:

1. hen the quantity of a variable input increases while

other inputs remain fixed. 't means( there is a directrelation between variable input & output.

". 'nput & output do not increase in the same proportion.There may be a phase when output increases faster than

increase in a particular variable input. This is a phase ofincreasing returns to the variable input. hen input &output increase in the same proportion( it is a phase ofconstant returns.

8/10/2019 5 Production ,Scale and Costs Class Imp2

4/24

PRACTICAL IMPORTANCE OF

PRODUCTION FUNCTION

Production function gives us idea of optimum level of the output & theoptimum employment of the variable inputs.

Production function tells management the budget needed for increase inoutput.

Production function explains the degree of substitution &complementarily of different factors of production.

)anagement should try to produce an upward shift in production whichcan definitely improve its financial performance under the given mar!et

productions.

8/10/2019 5 Production ,Scale and Costs Class Imp2

5/24

*efinitions:

1. Total physical product: Total quantity of output producedin physical units by a firm during a period of time.

". )arginal product: +hange in total product caused as a

result of one additional unit of variable factor employed

in combination with fixed factors is called ),#-',LP#*/+T.

).P0 T.P. 2ariable factor units

%. ,verage product: 't is the total product that a firm

produces divided by the quantity of a variable factor thatis used to produce it.

,.P. 0 T.P. 2ariable factor units

8/10/2019 5 Production ,Scale and Costs Class Imp2

6/24

LAW OF DIMINISHING RETURNS OR

THE LAW OF VARIABLE PROPORTION

3,s the proportion of one factor in a combination offactors is increased( after a point( first the marginal &then the average product of that factor will diminish.456.

7enham8 3,n increase in some inputs relative to other fixed inputswill( in a given state of technology( cause output toincrease9 but after a point the extra output resulting fromthe same additions of extra inputs will become less &

less.45P.,. $amulson8

8/10/2019 5 Production ,Scale and Costs Class Imp2

7/24

6ixed 6actor5say land &capital8

2ariable6actor5Labour units8

Total Product

5units8

,verageProduct5units8

)arginalProduct5units8

6 1 'ncreasing

6 " 1 ;. 1< #eturns

6 % %< 1< 1

6 = < 1". "< +onstant

6 ;< 1=.< "< #eturns

6 > ?< 1 "