The document discusses the production function in economics, emphasizing that production creates utilities rather than material. It defines key factors of production—land, labor, capital, and organization—and explains their roles in the production process. Additionally, it describes how inputs transform into outputs and introduces the concept of a production function as the relationship between these inputs and outputs.

1. PRODUCTION
FUNCTION
Dr.M.MADHAVAN
ASSISTANT PROFESSOR OF ECONOMICS
ARIGNAR ANNA GOVERNMENT ARTS COLLEGE, NAMAKKAL
TAMIL NADU, INDIA

2. INTRODUCTION
• The need for consuming a commodity leads to the production of the
commodity.
• Production is not a creation of mater.
• Man cannot either create or destroy matter. He can work on the matter
given by God or nature change its form and make it useful for mankind, like
that the gifts of nature are utilized by the man in satisfying his wants.

3. INTRODUCTION … …. …..
• In economics production means creation of utilities and not
matters.
• All things are use in this world come from nature by the working
of man. Tables and chairs we use come from forest.
• Iron & steel, the metals we use and the ornament etc., come from
the earth as gifts of nature so as to be useful for him.

4. INTRODUCTION … …. …..
• Production is not complete, unless the product is place in the hand of the
consumer.
• Hence all activities like producing raw materials assembling them,
transporting, manufacturing, storing, wholesale, business, retailing, banking,
Insurance etc., are all production activities. Without them, production
cannot be completed.

5. Factors of Production
• Production is done with the co-operation of factors of production.
• The factors of production are
• Land,
• Labour,
• Capital &
• Organisation.

6. Land as a factor of Production :
• In economics the term land as factor of production has a wider meaning.
Besides the surface of the earth it includes agricultural land, building sites,
mines, fisheries, forests, rivers, under ground water, air, sunshine etc.,
• It also includes animals and cattle. All the natural resources of the country
like mountains, lakes, waterfalls and valley come under this category land in
economics.
• In short land is nature - (minus) man.

7. Labour as a factor of production
• As a factor of production labour has some peculiarities.
• Labour is undertaken only for a reward. Any work for sympathy, affection, generosity or pleasure is
not called as labour.
• Labour is perishable, since labour is a human factor. Man cannot preserve his labour for some other
day. A day loss in labour’s life is lost forever.
• Labour is both means and end of economic activity. Land and Capital are only means of economic
activities.
• Labour is less mobile
• Supply of labour is independent of his demand. It depends on the size of the populations and
working force.
• Labour has poor bargaining power individually, as labour is perishable.
• labourers differ in their efficiencies.

8. LABOUR
• Differences in efficiency of labour arise due to
• Climatic factors
• Racial qualities of labour
• Education and training of labour
• Conditions of work
• Environmental factors
• Attitude of the Management and
• Attitude of labour unions

9. Capital as a factor of production
• Capital is not an original factor of production.
• All capital is wealth, but all wealth is not capital.
• An article of wealth cannot be called capital unless it is used for further
production of wealth.
• The chief types of capital assets are machinery, factories, railways,
vehicles etc.,

10. Organisation as a factor of production
• The first three factors, viz., land, labour & capital are powerless by themselves.
• These three factors have to be gathered, planned and managed in the productive
operation. Only then production will be possible.
• It is ‘organisation’ which does this function of co.-ordination the factors of
production.
• Organisation may be defined as the factor that starts the productive activity by
properly coordinating all other factors and successfully manages the business,
undertaking all risks arising out of the activity.
• The person who undertakes this work is called an entrepreneur.

11. THE PRODUCTION FUNCTION
• In modern terminology, the various factors like land, labour, capital, organization skill, raw
materials and other factors made use of in production are given a wider connotation called
inputs.
• The product realized due to the inputs is called output.
• Inputs indicate the cost involved in procuring various factors, commodities as raw materials,
power, etc., while output indicates the goods and services produced.
• Production is a process in which the physical inputs are transformed in to physical output. The
output is thus the function of inputs.
• The functional relationship between physical inputs and physical outputs of a firm is
known as production function. The production function is a catalogue of output
possibilities.

12. Production Function … … …..
• The production function can be algebraically expressed in an equation in
which the output is dependent variable and inputs are the independent
variables. The equation can be expressed as :
• q = f(a,b,c,d,.......n),
• where,
• q = rate of output
• a,b,c,d,...n = factors (inputs) and services used per unit of time

13. Production Function … …. …..
• “The production function is the name given to the relationship between the rates of inputs of
productive services and the rate of output of product. It is the economist’s summary of
technological knowledge”.
• Each firm has its own production function depending on the technical knowledge and
managerial ability.
• If there is an improvement in technology and managerial ability, the old production function will
be disturbed and a new production function can be had.
• The new production function has a greater flow of output from the original inputs or the same
flow of output for a lesser input.
• The entire concept of production function can be reduced to a schedule showing the
amount of output for different combinations of inputs.

14. Production function - Table
• Let us assume that for producing commodity only two inputs, viz., labour and
capital are required.
• The following table shows the quantity of output produced with some combination
of two inputs.
• It is a two-way table. Along the left-hand side, the varying amounts of capital are
listed. It is rising from 1 to 6 units.
• The intersection of the columns and rows may be called “Cells”. Each cell shows
the output when the corresponding combinations of labour and capital are made.

15. Production function - Table
OUTPUT OF X (Per Unit of Time)
INPUTOFCAPITAL
6 692 980 1200 1386 1550 1692
5 632 896 1296 1264 1410 1550
4 564 800 980 1128 1264 1386
3 490 692 846 980 1296 1200
2 400 564 692 800 896 980
1 282 400 490 564 632 692
1 2 3 4 5 6
INPUT OF LABOUR

16. Production function - Table … ….
• According to the table when 2 units of labour and 2 units of capital are combined as input, the
corresponding output per unit time will be 564.
• The table indicates various quantities of output when the input combination is varied. At the
combination of 5 units of labour and one unit of capital the output stands at 1410.
• In practice, all factors will not be changed. In the table, the combination of 6 units of labour and one
unit of capital (output: 692) gives the same output as that of the combination of 3 units of labour and 2
units of capital.
• The producer has to make decision about these two combinations giving the same result. Which
combination he will choose depends on the price of the two factors of production and the ease with which
the factor can be increased.
• Thus the production function gives the input-output relationship.
• The producer has to take into account the availability and productivity of the factors and select the most
economical combination for getting the desired output. This is done by means of least cost combination.

17. Assumptions of Production function
• It is related to a particular unit of time;
• The technical knowledge during that period of time
remains constant;
• The factors of production are divisible into most
viable units;
• The producer is using the best technique available.

18. Things to be noted … … …
• Paul H. Douglas, Professor at the University of Chicago introduced the
production function in 1934.
• Another prominent economist Robert Solow has also conducted extensive
research and found out how the technical progress has improved the
productivity of inputs, viz., capital and labour in America.
• The findings of Prof. Douglas after research in the theory of production are
in the next slide:

19. Things to be noted … … …
• The productivity of labour and capital has been increasing in the country due to
improved technology and skill. The average rate of improvement appears to be 1 ½
percent per year;
• The amount of capital has been growing faster than labour supply and wages have
tended to rise faster than the 1 ½ percent attributed to technological growth alone;
• The return per capital would easily encounter diminishing returns because of
technological innovation and also relatively lesser share of labour to combine with
capital.
• Thus the old law of diminishing returns has been given a new shape and
functions under the law of variable proportion and production function.

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