2. In This Lecture…
Concepts of Production
Factors of Production
Production Function
with One Variable
Input – Law of
Variable Proportion
Concepts of Total,
Average and Marginal
Products
4. Production Function
Production function is the technical
relationship between physical inputs and
physical output.
Q = f (L,K)
where, Q = output
L = labor
K = capital
5. Types of Production Function
Short-run Production Function : It refers
to the production in the short run where
there are some fixed factors.
Long-run Production Function : It refers
to the production in the long run where
all the factors are in variable supply.
6. Concepts of Product : Total
Product I
Total Product (TP) or Total Physical
Product (TPP) is the total quantity of
goods and services produced by a firm
with the given inputs during a specific
time period.
In the short run TP can be increased by
employing more units of variable factor.
In the long run TP can be increased by
employing more of all factors.
7. Concepts of Product : Total
Product II
Total Product (TP) schedule
Units of Labor (L)
Total Product (TP)
0
1
2
3
4
5
6
7
8
0
4
10
18
24
28
30
30
28
8. Concepts of Product : Total
Product III
Total Product Curve
TP
TP
0
TP curve starts from the
origin, increases at an
increasing rate , then
increases at a decreasing
rate reaches a maximum
and after that it starts
falling.
Units of labor
9. Concepts of Product : Average
Product I
Average Product (AP) or Average
Physical Product (APP) is the amount of
output produced per unit of a variable
factor during a specific time period.
Symbolically,
AP = Total Physical Product = TPP
Labor Input
L
10. Concepts of Product : Average
Product II
Average Product (AP) schedule
L
TP
AP
0
1
2
3
4
5
6
7
8
0
4
10
18
24
28
30
30
28
0
4
5
6
6
5.6
5
4.3
3.5
11. Concepts of Product : Average
Product III
Average Product Curve
AP
AP
0
TP curve starts from the
origin, increases at an
decreasing rate , reaches
a maximum and after
that it starts falling.
As long as TP is
positive AP is positive.
Units of labor
12. Concepts of Product : Marginal
Product I
Marginal Product (MP) or Marginal
Physical Product (MPP) is the change in
Total Physical Product due to the change
in employing one extra unit of a variable
factor.
Symbolically,
AP = Change in TPP
= ΔTPP
Changre in Labor Input
ΔL
14. Concepts of Product : Marginal
Product III
Marginal Product Curve
MP
MP curve starts from the
origin, increases initially
reaches a maximum and
starts falling and
becomes negative.
When TP is
maximum MP is zero.
0
Units of labor
MP
15. Relationship between TP, AP, MP
TP
TP
0
AP/MP
Variable factor (labor)
AP
0
Variable factor (labor)
MP
(i)
(ii)
(iii)
(iv)
When AP is maximum, MP=AP
(v)
When TP is maximum MP=0
When TP is falling MP is negative
(vi)
As long as TP is positive AP is positive
AP and MP are inverted
U-shaped curve
MP cuts AP at its max point
and at that point MP=AP
16. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product I
Law of Variable Proportion is widely
observed law of production that takes
place in short run.
Law of Variable Proportion states that as
we combine more and more of the variable
factor along with the fixed factor, TP
initially increases at an increasing rate,
then at diminishing rate and then at a
negative rate.
17. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product II
Law of Diminishing Marginal Product states that as
we combine more and more of the variable factor
along with the fixed factor, eventually a point will be
reached after which the marginal product of that input
start falling.
The classical economists called it the Law of
Diminishing Returns. They derived it by applying
more and more labour to a fixed acreage of land, and
thought of it as associated particularly with
agriculture. But it is a general principle that can be
applied to any production operation. It is now usually
called the Law of Variable Proportions. It can also be
called the Law of Diminishing Marginal product or
Diminishing Marginal Returns or simply as
Diminishing Returns.
18. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product III
Assumptions of the Law:(i) State of technology is constant.
(ii) All units of the variable factor are
homogenous.
(iii)There must always be some fixed
input.
19. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product IV
Three Stages of Production under the
Law:(i)
Stage of Increasing Returns
(ii)
Stage of Diminishing Returns
(iii)
Stage of Negative Returns
20. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product V
21. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product VI
Stage of Increasing Returns :-
In this stage, total product increases at an increasing rate
up to a point. This is because the efficiency of the fixed
factors increases as additional units of the variable factors
are added to it. In the figure, from the origin to the point F,
slope of the total product curve TP is increasing i.e. the
curve TP is concave upwards up to the point F, which
means that the marginal product MP of labor rises. The
point F where the total product stops increasing at an
increasing rate and starts increasing at a diminishing rate
is called the point of inflection. Corresponding vertically
to this point of inflection marginal product of labor is
maximum, after which it diminishes. This stage is called
the stage of increasing returns because the average
product of the variable factor increases throughout this
stage. This stage ends at the point where the average
product curve reaches its highest point.
22. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product VII
Stage of Decreasing Returns :In this stage, total product continues to increase
but at a diminishing rate until it reaches its
maximum point H where the second stage ends.
In this stage both the marginal product and
average product of labor are diminishing but are
positive. This is because the fixed factor has its
optimal use at this stage and becomes inadequate
relative to the quantity of the variable factor. At
the end of the second stage, i.e., at point M
marginal product of labor is zero which
corresponds to the maximum point H of the total
product curve TP. This stage is important
because the firm will seek to produce in this
range.
23. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product VIII
Stage of Negative Returns :In stage 3, total product declines and
therefore the TP curve slopes downward.
As a result, marginal product of labor is
negative and the MP curve falls below the
X-axis. In this stage the variable factor
(labor) is the over utilization of the fixed
factor.
24. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product IX-A
Importance and Applicability of the Law of
Variable Proportion:The Law of Variable Proportion has universal
applicability in any branch of production. It forms
the basis of a number of doctrines in economics.
The Malthusian theory of population stems from
the fact that food supply does not increase faster
than the growth in population because of the
operation of the law of diminishing returns in
agriculture.
25. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product IX-B
Importance and Applicability of the Law of
Variable Proportion:-
Ricardo also based his theory of rent on this
principle. According to him rent arises because
the operation of the law of diminishing return
forces the application of additional doses of labor
and capital on a piece of land. Similarly the law of
diminishing marginal utility and that of
diminishing marginal physical productivity in the
theory of distribution are also based on this
theory.
26. Returns to a Factor-Law of Variable Proportion
and Law of Diminishing Marginal Product IX-C
Importance and Applicability of the Law of Variable
Proportion:-
The law is of fundamental importance for understanding
the problems of underdeveloped countries. In such
agricultural economies the pressure of population on land
increases with the increase in population. This leads to
declining or even zero or negative marginal productivity
of workers. This explains the operation of the law of
diminishing returns in LDCs in its intensive form. Ragnar
Nurkse have suggested ways to make use of these
disguisedly unemployed labor by withdrawing them and
putting them in those occupations where the marginal
productivity is positive.
