1. Production Function
States the relationship between inputs and outputs
Inputs – the factors of production classified as:
Land – all natural resources of the earth – not just
‘terra firma’!
Price paid to acquire land = Rent
Labour – all physical and mental human effort
involved in production
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
3. Production Function
Mathematical representation
of the relationship:
Q = f (K, L, La)
Output (Q) is dependent upon the
amount of capital (K), Land (L) and
Labour (La) used
4. Types of Production Function
1. Short Run Production Function
2. Long Run Production Function
5. Short Run Production Function:
In the short run all other factors
are fixed in supply but at least one
factor is capable of being changed
to have more output.
This aspect of production function
is known as Law of variable
proportions.
Proportional relationship between
Production and factors of
production is referred to as Law of
Returns to a Factor
6. Long Run Production Function:
In the long run it is possible for a firm to change all
inputs up and down in accordance with its scale. This is
known as Return to scale.
When a producer changes all the factors of production
in the same proportion, the Proportional
relationship between Production and factors
of production is referred to as Law of Returns
to Scale
By doing this, the firm is able to increase its total
capacity – not just short term capacity
Associated with a change in the scale of
production
7.
8. Laws of Returns
1. Law of variable proportions.
2. Law of Returns to Scale
9. Law of variable proportions
Law of variable proportions stats that as
we increase quantity of only one input
keeping other inputs fixed, Total product
initially increases at an increasing rate,
then at a decreasing rate and finally at a
negative rate.
10. Law of Returns to Scale
Law of returns to scale refers to
increase in output as a result of
increase in all factors in the same
proportion.
11. Stages of Returns to Scale
1. Increasing Return to Scale
( Due to many type of internal economies)
1. Constant Return to Scale
(After reaching certain level of production internal and
external economies are balanced)
1. Diminishing Return to Scale
( Due to emerging diseconomies, Large company
creates difficulties of control)
