“ Production is the process that transforms inputs into output.”
“ Production is the process by which the resources (input) are transformed into a different and more useful commodity. Various inputs are combined in different quantities to produce various levels of output.”
Law of diminishing marginal returns/Law of returns to a variable input
“ As more and more units of a variable factor input are employed, all other input quantities held constant, the total output may initially increase at an increasing rate and then at a constant rate but it will eventually increase at diminishing rates”
“ During short period, under the given state of technology and other conditions remaining unchanged, with the given fixed factors, when the units of a variable factor are increased in the production function in order to increase the TP, the TP initially may rise at an increasing rate and after a point it tends to increase at a decreasing rate because the MP of the variable factor in the beginning may tend to rise but eventually tend to diminish.”
Continues to diminish (but must always be greater than zero) Keeps on declining and becomes negative STAGE III Reaches its maximum, becomes constant and then starts declining Starts diminishing Starts diminishing and becomes equal to zero STAGE II Increases at a diminishing rate and becomes maximum Increases (but slower than MP) Increases and reaches its maximum STAGE I Increases at an increasing rate Average Product Marginal Product Total Product
MRTS is the number of units of an input factor ( ex: K ) that a producer is willing to sacrifice for an additional unit of another input factor (ex: L) , so as to maintain the same level of output. (i.e., to remain on the same isoquant.)
Isoquant Map: A whole array of isoquants represented on a graph is called an isoquant map.
Economic Regions of Production – The ridge lines : The ranges over which the marginal products of the inputs are diminishing but positive.
On a convex isoquant the MRTS decreases along the isoquant and can become zero. A zero MRTS determines the minimum quantity of an input which must be used to produce a given output. Beyond this point an additional employment of one input will necessitate employing additional units of other input.
- A ridge line is the locus of points of isoquants where MP of input is zero.
External Economies of scale: They are those benefits or advantages available to all the firms in the industry from outside, irrespective of their size and scale of operation, due to expansion of the industry size.