This document discusses production, factors of production, and scales of production. It defines production as the creation of utilities to satisfy wants through goods, services, transportation, or storage. There are three types of production: primary from natural resources, secondary from processing primary products, and tertiary commercial and personal services. Production requires factors of land, labor, capital and organization. The laws of variable proportions, diminishing returns, and returns to scale describe how total product changes with varying levels of input. Isoquants and isocost curves illustrate production optimization by minimizing costs at a given output level. Equilibrium occurs when a firm maximizes profits by producing where marginal revenue equals marginal cost.

1. Introduction to Production,
Factors of Production and
Scales
Nitish Kumar Arya
M.A. Economics
Banaras Hindu University
Varanasi – 221005

2. What is Production?
• Production to an economist, is the creation of utilities to
satisfy wants; whether that means the creation of a good
itself in agriculture or industry; its transport from the
point of production to the point of consumption
(geographical distribution); its transport through time
from the moment of production to the moment of
consumption, in stock-piles, cold stores, warehouses or
granaries (distribution through time); or the provision
of personal services directly enjoyed by individuals or
groups such as health education, health and
entertainment

3. Types of Production
• Primary production - Man’s inheritance of
natural wealth such as mining, agriculture,
fishery, forestry etc
• Secondary production - derived production
from natural primary products - industry for
example
• Tertiary production
– Commercial services - wholesale, banks,
insurance, export house
– Personal services - professor, doctor, advocates

4. Production Theory
• In production resources used for the production
of a product or service are known as factors of
production (also known as inputs)
– land
– labour
– capital
– organization
• Production Function
– P = f(A,B,C,D)

5. Law of Variable Proportions
• “as the quantity of a variable input is increased
by equal doses, keeping the quantities of other
inputs constant, the total product will increase,
but after a point, at a diminishing rate”
• In other words, when more and more units of
the variable factor is used (holding the
quantities of other factors constant), a point is
reached beyond which the marginal product,
then the average product and finally the total
product will diminish
• This law is also known as law of diminishing
returns

6. Law of Diminishing Returns

7. -20
0
20
40
60
80
0 5 10
Total Pdt
Avge Pdt
Marginal Pdt
Law of Diminishing Returns

8. Importance of Law
• It applies to not only agriculture but also
industry - universal applicability
• By substituting one factor in place of other,
efficiency (or higher levels of production
and productivity) can be achieved
• Remember the importance of capital and
labour as factors of production in
developing nations

9. Law of Returns to Scale
• What happens when all the inputs are
increased in the same proportion?
• The scale of production will increase - but
effect on production shows three stages
– Increasing Returns to Scale
– Constant Returns to Scale
– Diminishing Returns to Scale

10. Law of Returns to Scale

11. LawofReturnstoScale
0
5
10
15
0 20 40 60 80
Scale
Returns

12. Production Function
Isoquant and Isocost Approach
• An isoquant is a curve on which the various
combinations of labor and capital show the
same output. This curve is also known as
production indifference curve

13. Production Function
Isocost Approach
• Isocost curves are also known as outlay lines,
price lines, input-price lines, factor-cost lines,
constant-outlay lines etc. Each isocost line
represents the different combinations of two
inputs that a firm can buy for a given sum of
money at the given price of each point.

14. Isocost - Diagram
• The point where the isocost line tangent to an isoquant curve
represent the least-cost combination of the two factors
capital
labour

15. Equilibrium of a Firm -What is
equilibrium?
• Firms will produce in such a way that the profit is
maximized
• Firms will not change the production function at
equilibrium output
• Profit = TR-TC
• TR = P x Q (price x quantity)
• AR = TR/Q = (P x Q)/Q = P
– therefore, AR curve showing different values of AR at
various levels of output is same as the demand curve
faced by an individual firm (latter shows quantities)

16. Shape of Demand Curve
• Relationship between AR and Q is shown by the
shape of the demand or AR curve
– AR upward sloping or rising left to right
– AR downward sloping
– AR horizontal to X axis
• First possibility is unlikely - a firm may not be
able to sell larger and larger output by charging
higher and higher price
• The second and third depends on the type of
market

17. Marginal Revenue
• MR= TR (N+1) - TR (N) or change in total
revenue upon change in quantity
• Therefore, MR is equal to the slope of TR curve
• Relation between AR and MR
– MR = change TR/change Q
• MR = change (PxQ)/change Q
• = change (ARxQ)change Q
• =AR(change Q/change Q) + Q (change AR/change Q)
– MR=AR+Q(change AR/change Q)
– therefore (MR-AR) = Qx(slope of AR curve)
• MR = AR when AR is horizontal and MR is <AR when
AR is downward sloping