1. PRODUCTION, PRODUCTION FUNCTION
PRODUCTION IN THE SHORT RUN

2. PRODUCTION

Production process involves the
transformation of inputs into output. The
inputs could be land, labour, capital,
entrepreneurship etc. and the output could
be goods or services.

An entrepreneur must put together resources -land, labour, capital -- and produce a product
people will be willing and able to purchase

3. In a production process managers take four
types of decisions:
 (a) whether to produce or not,
 (b) how much output to produce,
 (c) what input combination to use,
 (d) what type of technology to use.


4. PRODUCTION FUNCTION

States the relationship between inputs and outputs

A production function is the functional
relationship between inputs and output. It
shows the maximum output which can be
obtained for a given combination of inputs.

5. 
It expresses the technological relationship between inputs
and output of a product

In general, we can represent the production function for a
firm as:Q = f (x1, x2, ….,xn)

Where Q is the maximum quantity of output, x1, x2, ….,xn
are the quantities of various inputs, and f stands for
functional relationship between inputs and output. For the
sake of clarity, let us restrict our attention to only one
product produced using either one input or two inputs. If
there are only two inputs, capital (K) and labour (L), we
write the production function as = f (L, K)

6. 
Inputs – the factors of production classified as:

Land – all natural resources of the earth


Labour – all physical and mental human effort involved in
production


Price paid to acquire land = Rent
Price paid to labour = Wages
Capital – buildings, machinery and equipment
not used for its own sake but for the contribution
it makes to production

Price paid for capital = Interest

7. Inputs
Process
Land
Labour
Capital
Product or
service
generated
– value added
Output

8. PRODUCTION IN THE SHORT RUN

Short run is a period just short enough that at
least
one
resource
(input-industrial
plant, machines) cannot be changed -- is fixed or
inelastic. thus in the short run production of a
commodity can be increased by increasing the
use of only variable inputs like labour and raw
materials.

9. Short Run
Plant size is
fixed, labor is
variable

10. DEFINITION OF SHORT RUN

Short run is a period of time over which at least one factor
must remain fixed. For most of the firms, the fixed resource
or factors which cannot be increased to meet the rising
demand of the good is capital i.e., plant and machinery.

Short run, then, is a period of time over which output can be
changed by adjusting the quantities of resources such as labour,
raw material, fuel but the size or scale of the firm remains fixed.

11. ANALYSIS OF PRODUCTION FUNCTION:
SHORT RUN
In the short run at least one factor fixed in supply
but all other factors capable of being changed
 Reflects ways in which firms respond to changes
in output (demand)
 Can increase or decrease output using more or
less of some factors but some likely to be easier
to change than others
 Increase in total capacity only possible
in the long run


12. PRODUCTION FUNCTION SHORT RUN
In times of rising
sales (demand)
firms can increase
labour and capital
but only up to a
certain level – they
will be limited by
the amount of
space. In this
example, land is
the fixed factor
which cannot be
altered in the short
run.

13. PRODUCTION FUNCTION SHORT RUN
If demand slows
down, the firm can
reduce its variable
factors – in this
example it reduces
its labour and
capital but again,
land is the factor
which stays fixed.

14. PRODUCTION FUNCTION SHORT RUN
If demand slows
down, the firm can
reduce its variable
factors – in this
example, it
reduces its labour
and capital but
again, land is the
factor which stays
fixed.

15. PRODUCTION FUNCTION SHORT RUN

16. PRODUCTION FUNCTION SHORT RUN
Unit of capital
No Of labours
Total out put
AP
MP
1
1
3
3
3
1
2
8
4
5
1
3
12
4
4
1
4
14
3.5
2
1
5
14
2.8
0
1
6
12
2
-2