This document discusses production functions and the concept of returns to scale. It defines a production function as the relationship between a firm's output and inputs. It describes the concepts of total product, average product and marginal product. It explains the short run and long run, and the assumptions of the law of variable proportions. It discusses increasing, decreasing and constant returns to scale, and the causes of each. It also covers internal and external economies of scale, and potential diseconomies of large scale production.

1. HARYANA SCHOOL OF BUSINESS
PRESENTETION :- MANAGRIAL ECONOMIC
production function
GURU JAMBHESHWER SCIENCE &
TECHNOLOGY UNIVERSITY ,HISSAR

2. “PRODUCTION IS THE TRANSFORMETION OF INPUT
INTO OUTPAT “
WHAT IS PRODUCTION ????

3. PRODUCTION FUNCTION

4.  “Production function is the relation between
A firm’s production (output) and the material
factor of production (input)”
_Watson
PRODUCTION FUNCATION

5. Total product (TP)
Average product (AP)
Marginal product (MP)
5
To increase
production firms
increase Labor but
can’t expand their
plant

6. Short Run vs. Long
Run
The short run is defined as
the period of time when
the plant size is fixed.
The long run is defined as
the time period necessary
to change the plant size.
6
Plant size is
fixed, labor
is variable
Both Plant
size and labor
are variable
To increase
production firms
increase Labor
but can’t expand
their plant
To increase
production firms
can increase
both: Plant size
and Labor

7. •Total product is the total amount of goods and
services product in a given period .
TOTAL PRODUCT
•Marginal product is the change in total product due to
application of one more or less unit of variable factor .
MARGINAL PRODUCT
•A average production is per unit production of the
variable factor .
AVERAGE PRODUCT
Three concept of production
function

8.  Returns to a factor : law of variable proportions
The law of variable proportion states that the input of
one resources is increased by equal increment per unit of
time while the inputs of other resources are held constant
, total output will increases , but beyond some point the
resulting output increases will become smaller and
smaller
leftwich
LAW OF PRODUCTION

9. ASSUMPTION OF LAW
The ratio which factor of production are combined
can be
changed.
 units of variable factor are homogeneous or equally
efficient and
are increased one by one. Thus diminishing returns
start occurring
not because latter unit of the variable factor are less
efficient
then the former once , but because fixity of the factor .
State of technology does not change.

10.  indivisibility of factors
Change in factor ratio
Imperfect substitutes
Condition of applicability

11. • Increasing return to a factor :- increase return
to factor sates as the proportion of one factor
in a combination of factors is increased upto a
point the, marginal productivity of the factor
will increase.
Retunes to a factor

12. Y (A) TP Y (B) MP
TOTAL (TP tends to increase m
Product at the
increasing rate) MP tends to
increase
Marginal
Product
O X O X
UNIT OF VERIABLE FACTOR UNIT OF VERIABLE FACTOR
Increasing returns to a factor

13. Under utilisation of fixed factor
Increase in efficiency
Better coordination between the factors
Cause of increasing returns to a
factor

14.  Constant returns to a factor occurs when additional application
of the variable factor increases output only at a constant rate.
Y (A) TP Y (B)
TOTAL
PRODUCT TP Increases at MARGINAL
constant0 rate PRODUCT mp is consant MP
O X O X
UNIT OF VARIABLE FACTOR UNIT OF VARIABLE FACTOR
Constant return to factor

15. Optimum utilisation of the fixed factor
Ideal factor ratio
Most efficient of the utilisation of variable
factor
Couse Of constant returns to a factor

16.  an increase amount of capital and labour
applied in the cultivation of land cause , in
general in a less then proportionate increase
in the amount of product raised unless it
happens to coincide with an improvement in
the art of agriculture.
Diminishing return to a factor

17. Diminishing return to factor
TP Increase at
diminishing rate
finally it starts
declining
TOTAL
PRODUCT
UNIT OF VARIABLE FACTOR
UNIT OF VARIABLE FACTOR
MP declines to ultimately
Become zero or even negative
MP
ZERO
- VE

18.  Fixity of factor
 Imperfect factor substitutability
 Poor coordination between the factors
CAUSE OF DIMINISHING RETURNS
TO A FACTOR

19. THREE STAGES OF PRODUCTION
product
product
No. of laborers

20. STAGES TOTAL
PRODUCT
MARGINAL
PRODUCT
AVERAGE
PRODUCT
1 STAGE Initially it
increases at an
increasing rate.
Later at
diminishing rate
Initially increases
and reaches the
maximum point.
The starts
decreasing
Increases and
reaches at
maximum point
2 STAGE Increasing at
diminishing rate
and reaches its
maximum point
Decreases and
becomes zero
After reaching its
maximum beings
to decreases
3 STAGE Begins to fall Become
negative
Continues to
diminish
THREE STAGES OF PRODUCTION

21.  “The term return to scale refer to the change
in output as all factor change by the same
proportion ”
RETURN TO SCALE
P = f[L,K]

22.  Increasing return to scale occur when a given
percentage increase in all factor inputs cause
proportionately grater increasing in output
INCREASING RETURNS TO SCALE

23. y Q
25
20
15
10
5
0
5 10 15 20 25 x
% increase in all factor inputs
Increasing returns to
scale
%
Increase
in
output

24.  Constant return to scale occurs when
percentage increase in all factor input cause
equal percentage increase in output
Constant returns to scale

25. y
Constant returns to scale
% increase in all factor inputs
%
Increase
In output
Q
20
10
0
10 20 X

26.  Decreasing returns to scale occurs when
given percentage increase in all factor inputs
causes proportionately lesser increase in
output.
DECREASING RETURNS TO SCALE

27. Y
% increase
in
output
10
5
0
5 10 15 20 25 30 X
% increase in all factor inputs
DECREASING RETURNS TO SCALE
15

28.  Increasing rate to scale refer to the situation
in which increasing the scale of production
reduces the unit cost of production or raises
output per unit of the factor inputs.
Couse of increasing return to scale

29.  internal economies of scale :- when a firm
increases its scale of production it enjoys several
economies. These economies are called internal
economies.
 real economies :- real economies are those which
are associated with a reduction in the physical
quantity of inputs raw materials various type of
labour and various type of capital.
Real economies can be six type :-
Increasing return to scale

30. Labour economies or specialization
Technical economies or indivisibility
Inventory economies
Selling or marketing economies
Managerial economies
Transport and storage economies

31. External economies are those economies which
are industry specific.
Economies of concentration
Economies of information
Economies of disintegration
External economies

32. Internal economies
Difficulties of large scale management
Co-ordination
Supervision
Operational efficiency
Diseconomies of scale

33. External diseconomies
Localisation
Skilled

34. Presented by :- GURMEET SINGH & GORAV CHOBEY