Costs and Benefits Analysis of Small Scale Jatropha Curcas Plantation in Cambodia
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Transcript of 5 Production ,Scale and Costs Class Imp2
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PRODUCTION AND
COSTS
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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.
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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.
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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.
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*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
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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
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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 "
