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Meaning of production

Production refers to the


transformation of inputs or resources
into outputs or goods and services.
- production is a process in which
economic resources or inputs are
combined by entrepreneurs to create
economic goods and services.
Production Function
 The term production function refers to
the relationship between the inputs
and the outputs produced by them.
- The term factors of production and
resources are used interchangeably
with the term inputs.
A production function describes the
technological relationship between
inputs and outputs in physical terms
 The relationship is purely physical or
technological in nature, thus it
ignores the prices of inputs and
outputs.
 The study of production function is
directed towards establishing the
maximum output which can be
achieved with a given set of
resources or inputs with a given level
of technology.
 The production function can be
stated in the general form of an
equation
Y= f(L,C,T,t,M etc)
 In economic theory we are concerned with the
three types of production function,

 Production function with one variable inputs


 Production function with two variable inputs
 Production function with all variable inputs.
 Production function with one variable
inputs.
Law of variable proportions.
In economics, Production function with
one variable input is illustrated with
the well-known law of variable
proportions.It has also been called as
the law of diminishing marginal
returns.
 When increasing amounts of one
factor of production are employed in
production along
with a fixed amount of some other
production factor, after some point,
the resulting
increases in output of
product(Marginal Product) become
smaller and smaller.
 Prof.Benham – As the proportion of one
factor in a combination of factors is
increased,after a point, first the
marginal and then the average product
will diminish.
 The point worth noting that the law
does not state that each and every
increase in the amount of variable
factor employed in the production
process will yield diminishing marginal
returns.
 Itis possible that initial increases in the
amount of variable factor employed in
the production process may yield
increasing marginal returns.However a
point will be reached where the
marginal product will begin declining.
 Assumptions.
- Constant technology
If technology changes, marginal and
average product may rise instead of
diminishing.
- short run
The law operates in the short run
because it here that some factors fixed
and others
are variable.In the long run, all factors
are variable.
- homogenous inputs
The variable input as applied unit by
unit is homogenous or identical in
amount and quality
- It is possible to use various amounts of
a variable factor on the fixed factors of
production.
A of Labor TP AP MP
1 10 10 10
2 30 15 20
3 60 20 30
4 80 20 20
5 95 19 15
6 108 18 13
7 112 16 4
8 112 14 0
9 108 12 -4
10 100 10 -8
 The production function with two
variables
A firm may increase its output by
using more of two variables that are
substitutes for each other,eg,labour
and capital
- There may be various technical
possibilities of producing a given output
by using different factors of
production.
 Iso – quants.
- An isoquant is also known as Iso –
product curve or a producton
indifference curve.
Iso – quants show the various
combination of two variable inputs that
results in same level of output.
Combinati Units of Units of Total MRTS
ons lobor capital product
A 1 20 50
B 2 15 50 5:1
C 3 11 50 4:1
D 4 8 50 3:1
E 5 6 50 2:1
F 6 5 50 1:1
 MRTS
MRTS is the rate at which one factor
input can be substituted for another,
keeping the total output constant.
MRTS of L for K is defined as the
number of units of input K that a
producer is willing to sacrifice for an
additional unit of C to maintain the
same level of output.
 Iso – cost Curves
Iso cost lines represents the
combinations of two inputs that a
produces can afford or apply with his
given income and input prices.
 Isocost line is influenced by two
important factors
 Input prices
 Monetary resources.
 Optimum factor combinations
 The laws of returns to scale.
The laws of returns to scale explain the
behaviour of the output in response to
a proportional and simultaneous
change in input. Increasing inputs
proportionately and simultaneously is,
in fact an expansion of the scale of
production.
 In the long run, output can be
increased by increasing the scale of
operations .Increasing the scale of
operations means increasing all the
factors at the same time and by the
same proportions.
 Returns to scale are classified as;
- Increasing Returns to Scale
If output increases more than
proportionate to the increase in all
inputs.
- Constant Returns to Scale
If all inputs are increased by same
proportions ,output will also increase
the same proportion.
- Decreasing Returns to Scale
If output increases less than
proportionate to the increase in all
inputs.