2. Contents
What is production?
4 factors of production
Production function
Long run & Short run
Variable and fixed factors
Types of product
Law of Variable Proportion
Explanation of graph
Relationship between
TP & MP, AP & MP
Stages of Production
Stay in which stage?
3. What is Production?
The transformation of resources (Land, Labor, Capital,
Entrepreneurship) into a different and more useful
commodity (Example- Car) through a process is called
production.
4.
5. Production Function
A production function is a way of showing how much
output a firm can produce with different amounts of
inputs.
Inputs are the things that a firm uses to make its products,
such as land, labor, capital, and entrepreneurship. Outputs
are the products that the firm sells, such as goods or
services.
For example, suppose a firm in India produces wheat using
land and labor as inputs. The production function tells us how
much wheat the firm can produce with different combinations
of land and labor.
6. The production function can be written as a mathematical
equation, such as:
Q = f(L, LA, K, E)
where Q is the output, L is land, LA is the labor input, and K is
the capital input & E is entrepreneurship. This equation
means that the output depends on the amount of labor and
capital used by the firm.
7. Long run & Short run
Long run
Short run refers to that time
period in which the supply of
certain factors is fixed i.e. it
cannot be increased or
decreased. E.g. plant,
machinery, building, etc.
Therefore, a firm can increase
the production of a commodity
in the short run, by increasing
the use of variable factors
such as labor and raw
materials.
Short run
Long run refers to that time
period in which supply of all
factors i.e. fixed and variable is
elastic. In the long run, no
factor is a fixed factor, all
factors are variable.
Therefore, a firm can increase
the production of a commodity
in the long run by increasing
the use of both variable and
fixed factors of production.
8. Variable factors & Fixed factors
Variable factors
• It refers to those factors which can be changed in the short
run.
• It varies directly with the level of output.
• For example: Raw material, casual labour, etc.
Fixed factors
• It refers to those factors which can not be changed in the
short run.
• They do not vary directly with the level of output.
• For example: Plant, machinery, etc.
9. Types of Products
Total product (TP) is the total amount of output that a
firm can produce with a given amount of inputs. For
example, if a firm uses 10 workers and 5 machines to
produce 100 units of goods, then the total product is 100.
Marginal product (MP) is the additional amount of
output that a firm can produce by using one more unit of
a variable input while keeping other inputs constant. For
example, if a firm uses 10 workers and 5 machines to
produce 100 units of goods, and then hires one more
worker and produces 105 units of goods, then the
marginal product of labor is 5.
10. Average product (AP) is the output per unit of a variable input,
which is obtained by dividing the total product by the amount of
the variable input. For example, if a firm uses 10 workers and 5
machines to produce 100 units of goods, then the average
product of labor is 10.
11. Law of Variable Proportion
The law exhibits the relationship between the units of a
variable factor and the amount of output in the short term.
This is assuming that all other factors are constant. This
relationship is also called returns to a variable factor.
The law states that keeping other factors constant, when
you increase the variable factor, then the total product
initially increases at an increasing rate, then increases at a
diminishing rate, and eventually starts declining.
13. Following are the assumptions of the law of variable
proportions:
1. Only one factor is variable while the other factors are constant.
2. This law will not be applicable in conditions where the factors
are varied proportionately.
3. The variable units are homogeneous in nature i.e. all have equal
efficiency.
4. The price for input remains unchanged.
5. The technology used may remain the same or unchanged at any
given point of time.
6. This is applicable for short run only.
14.
15. Stages of Production
The first stage is when adding more input increases the
output by a lot. This is because the input is used efficiently
and productively. For example, if you have a farm with a lot
of land but few workers, hiring more workers will help you
grow more crops.
TP increases at increasing rate
16. The second stage is when adding more input increases the
output by a little. This is because the input is used less efficiently
and productively. For example, if you have a farm with a lot of
workers but not enough tools, hiring more workers will not help
you grow much more crops. (TP increases at diminishing rate)
The third stage is when adding more input decreases the output.
This is because the input is used wastefully and unproductively.
For example, if you have a farm with too many workers and too
many tools, hiring more workers will make the farm crowded and
chaotic, and reduce the crop yield. (TP falls)
17. Relationship between TP, MP &
AP, MP
The relationship between TP and MP
MP increases when TP increases at an increasing
rate,
MP decreases when TP increases at a diminishing
rate,
MP is zero when TP is maximum, and
MP is negative when TP decreases.
18. The relationship between AP and
MP
• AP increases when MP is greater than AP,
• AP decreases when MP is less than AP, and
• AP is maximum when MP is equal to AP.
19. At which stage a producer should
stay?
Stage 2, ………………but why?
This is because in this stage, the producer can achieve
the maximum output with the given fixed factor and the
variable factor, and also the lowest average cost of
production. In other words, the producer can attain the
optimal level of efficiency and profitability in this stage.
20. What about stage 1?
This is because in this stage, the producer is underutilizing the
fixed factor and the variable factor, and hence the average cost
of production is high. The producer can increase the output and
reduce the cost by increasing the variable factor in this stage.
Stage 3?
This is because in this stage, the producer is overutilizing the
fixed factor and the variable factor, and hence the average cost
of production is very high. The producer can decrease the cost
and increase the output by decreasing the variable factor in this
stage.
