PRODUCTION FUNCTIONBY – ABHINAV SINHA (BBA)

PRODUCTIONPROCESS OF TRANSFORMING OUTPUTS INTO

INPUTS FOR EXAMPLE :-LAND INTO RENTLABOUR INTO WAGESCAPITAL INTO INTERESTORGANIZATION INTO PROFIT MANAGER INTO SALARY

WHAT IS PRODUCTION……????IT IS FUNCTION OF ITS INPUTS i.e. LAND ,

LABOUR , CAPITAL , etc .IT IS A RELATIONSHIP BETWEEN PHYSICAL

INPUTS & OUTPUTS .IT IS THE AMOUNT OF OUTPUT THAT CAN

BE PRODUCED GIVEN QUANTITIES OF INPUTS DURING A GIVEN PERIOD OF TIME .

PRODUCTION

FACTORS OF PRODUCTIONFACTORS OF PRODUCTION ARE DIVIDED INTO

TWO CATEGORIES BASED ON TIME :-VARIABLE FACTORSFIXED FACTORS

VARIABLE FACTORSFACTORS OF PRODUCTION THAT CAN BE

CHANGED WITH LEVEL OF OUTPUT .EXAMPLE – LABOUR .

FIXED FACTORSFACTORS OF PRODUCTION THAT CANNOT BE

CHANGED WITH THE LEVEL OF OUTPUT .EXAMPLE – LAND & CAPITAL .

TYPES OF PRODUCTION FUNCTIONTHERE ARE TWO TYPES OF PRODUCTION

FUNCTION :-PRODUCTION FUNCTION WITH VARIABLE

FACTORS.PRDUCTION FUNCTION WITH ALL FACTORS

OF PRODUCTION.

PRODUCTION FUNCTION WITH VARIABLE FACTORS

IT IS THE RELATIONSHIP BETWEEN THE VARIABLE FACTORS AND THE PRODUCTION .

WHEN IT IS TAKEN INTO ACCOUNT IT IS CALLED PRODUCTION WITH VARIABLE FACTORS .

IT IS A SHORT TERM PHENOMENON AND IT IS ALSO CALLED “LAW OF VARIABLE PRPORTIONS” .

PRODUCTION FUNCTION WITH ALL FACTORS OF PRODUCTION

IN THIS BOTH FIXED & VARIABLE FACTORS OF PRODUCTION FUNCTION ARE TAKEN INTO ACCOUNT , TO ESTABLISH THE RELATIONSHIP WITH THE PRODUCTION .

IT IS A LONG TERM PHENOMENON AND IS ALSO CALLED “LAW OF RETURNS TO SCALE”.

ASSUMPTION OF PRODUCTION FUNCTIONTHE TECHNOLOGY IS GIVEN AT CONSTANT .LABOUR IS VARIABLE FACTOR ALL OTHERS

FACTORS ARE CONSTANT .POSSIBILITY OF CHANGING THE PROPORTION OF

VARIOUS INPUTS WHICH ARE COMBINED TOGETHER

ALL VARIABLE FACTORS ARE HOMOGENOUS IN NATURE .

APPLICABLE ONLY IN SHORT RUN.PRODUCT IS MEASURED IN TERMS OF UNIT ONLY .THE PRICE OF PRODUCT & INPUT IS FIXED &

CONSTANT.

LAW OF VARIABLE PROPORTIONSIT IS A SHORT-TERM CONCEPT .PRODUCTION OF A COMMODITY CAN BE

INCREASED BY INCREASING THE NUMBER VARIABLE INPUTS WHERE FIXED FACTORS ARE CONSTANT .

INCREASE IN NUMBER OF OUTPUTS CHANGES THE RATIO BETWEEN VARIABLE & FIXED INPUTS

THIS SITUATION IS CALLED THE “LAW OF VARIABLE PROPORTIONS”.

LAWS…!

!!

DIFFERENCE BETWEEN LAW OF VARIABLE PROPORTIONS & LAW OF RETURNS TO SCALE

LAW OF VARIABLE PROPORTIONS

LAW OF RETURNS TO SCALE

IN THIS INPUT & OUTPUT RELATIONSHIP ARE STUDIEDWITH ONE VARIABLE & OTNERS ARE FIXED.

STAGES ARE NEGATIVE INCREASING & DECREASING.

PRICES ARE FIXED.TECHNOLOGY IS FIXED

& UNCHANGEABLE

IN THIS ALL INPUTS ARE VARIABLES.

STAGES ARE INCREASING,DECREASING & CONSTANT RETURNS.

PRICES ARE CHANGEABLE .

TECHNOLOGY IS CHANGEABLE & WE CAN CHANGE TECHNOLOGY IS ACCORDING TO THE NEED.

GRAPHICAL REPRESENTATION OF LAW OF VARIABLE PROPORTIONS

PROPERTIES OF LAW OF VARIABLE PROPORTIONSINITIALLY TP , MP , AP ALL INCREASES.MP CUTS AP FROM ABOVE WHERE AP IS

MAXIMUM & TP REMAINS INCREASING.WHEN TP BECOMES MAXIMUM MP

BECOMES ZERO WHILE TP FALLS.TP , MP , AP START FALLING WHERE TP &

AP ARE POSITIVE WHILE MP BECOMES NEGATIVE .

TP MP

AP

STAGES OF LAW OF VARIABLE PRPORTIONSSTAGE OF INCREASING RETURNS.STAGE OF DECREASING RETURNS.STAGE OF NEGATIVE RETURNS.

GRAPHICAL REPRESENTATION OF LAW OF RETURNS TO SCALE

STAGES OF LAW OF RETURNS TO SCALEINCREASING RETURNS TO SCALE.CONSTANT RETURNS TO SCALE.DECREASING RETURNS TO SCALE.