This document discusses key concepts related to production including: 1. Production involves converting inputs into outputs in order to satisfy human wants, with the main factors of production being land, labor, capital, and entrepreneurship. 2. A production function shows the relationship between inputs and outputs, with outputs taking the form of volume based on mathematical terms involving factors of production. 3. There are different stages of production including increasing, diminishing, and negative returns based on how marginal product and average product change with variable inputs.

1. Production
In common term,
• Conversation of physical inputs into physical output.
• To create something
In economic term,
• Convers resources, working upon them so satisfy
human wants.
• Creation of utilities in form of goods or services.

2. Factors or resources of production
• Land :- it nature gift, supply of land is
fixed.
• Labour :- mental and physical exertion
to production
• Capital :- man made instrument of
production.
• Entrepreneur :- mobilize above
factors & bear risk.

3. Production function
• Relationship between inputs & outputs
• Inputs (4 factors) == outputs (take form of volume)
• It uses mathematical terms like
• Q = f (factors) (a, b, c, d…………n)
Q stand for outputs, (a, b, c, d, ….n are factors or resources used)
• Short term function one of the inputs used & other remains
unchanged
• Long term function free to vary amount of all inputs used.

4. Assumption or estimation
• Technical knowledge
• Factors divides into viable units
• It require to uses best techniques
• It related to a particular unit of time
Cobb-Douglas production function
It applies not to an individual firm
but to whole of manufacturing firm in U.S.
Q = KLa C(1-a)
Contribution = Labor 3/4th, Capital 1/4th
Q = Output
L = Qty. of labor
C = Qty. of capital
K & a = positive
constant

5. Production with one and two variable inputs
Q = f (x, y)
q=output, x=labor, y=capital
• 2 unit of X & 2 unit of Y gives 18 outputs. (blue colour cell)
• Adding 1 unit to X (2+1) 3 & Y constant/same as i.e. 2 then
it gives 29 outputs. This is short term production function.
• Increase both X & Y by 1 i.e. 3 & 3 respectively then it
gives output of 4. this is long term production function.
Capital (Y) Output (quantity)
4 24 39 52 60
3 17 29 41 52
2 8 18 29 39
1 4 8 14 20
Labor (X) 1 2 3 4

6. Three Stages of production
Variable
input (X)
Total
product
(Q OR TP)
Marginal
product
(MP)
Average
product
(AP)
0 0 - 0
1 8 8 8
2 18 10 9
3 29 11 9.67
4 39 10 9.75
5 47 8 9.4
6 52 5 8.67
7 56 4 8
8 52 -4 6.5
Lets understand through example…..

7. 0
10
20
30
40
50
60
1 2 3 4 5 6 7 8 9
TOTAL PRODUCT
Variables
Outputs
Stage 1
Law of
Increasing return
Stage 2
Law of
diminishing
return
Stage 3
Law of negative
return
Total
Product
TP

8. -6
-4
-2
0
2
4
6
8
10
12
1 2 3 4 5 6 7 8 9
MP
AP
Variables
Stage 1
Law of
Increasing return
Stage 2
Law of
diminishing
return
Stage 3
Law of negative
return

9. Economy of scale
• In long run production organization gets benefits like low
cost and more output so in this case we can say that
company experiencing economic of scale.
• If in long run average cost is high but output is also high
then it is sign of diseconomies of scale.
• Two economies arise in long run production
1. Internal economies :- it occur to the firm when it
expands the outputs, cost reduce, place better in the market to
compete.
2. External economies :- benefits accruing to member
industries as a result of expansion of industries.

10. Law of variable proportions
• It examines the production function with one
factor variable, keep Qty. of other factor fixed.
• It refers to input-output relationship
(For example = input increase output increase)
• One input increase with other fixed input,
marginal physical productivity decline.
Input Product (Qty.)
1 8
2 18
7 56
8 52

11. -10
0
10
20
30
40
50
60
1 2 3 4 5 6 7 8 9
TP
MP
AP
Variable
Output

12. Law of return scale
• Behavior of output in response to change in scale.
• Change in scale means all factors are increase or decreased
in same proportion.
• It may be constant increase or decrease.
• If scale increase in given proportion then output increase
same proportion.
0
200
400
600
1 2 3 4 5
Constant
Labor
Capital
• Increase scale proportion same
increase in output proportion.
• It is also called linear
homogeneous product function.
• Due to ……………..

13. 0
200
400
600
1 2 3 4 5
Increase
• Output increase greater
proportion than the increase in
inputs.
• Due to better management,
brand value, qualitative
product. Labor
Capital
• Output increase smaller
proportion with an increase in
all inputs.
• Due to control, co-ordination,
difficulties in management, 0
200
400
600
1 2 3 4 5
Decrease
Labor
Capital

14. Conclusion
Thank you….