unit iv-production function

7/30/2019 Unit IV-Production Function

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PRODUCTION ANALYSIS

By

Mrs. N. Jayaprada Srinivas


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INTRODUCTION

In the supply process, people first offer their factors ofproduction to the market.

Then the factors are transformed by firms into goods that

consumers want.

Productionis the name given to that transformation offactors into goods.

Production is the process of transformation of inputs into

goods and services of utility to consumers and/or

producers.


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FACTORSOF PRODUCTION

Land - Rent Labour - Wages

Capital - Interest

Enterprise/Management Profit

Technology Raw materials

Types of Inputs

Fixed

Variable


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PRODUCTION FUNCTION

Production function technological relationship between

the inputs (factors of production) and outputs over a givenperiod of time.

The production function tells the maximum amount of

output that can be derived from a given number of inputs.

Qp= f {Land, Capital, Labour, Efficiency parameter}

-Always related to a given time period.

-Always related to a certain level of technology.

-Depends upon relation between inputs.


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THE PRODUCTION PROCESS

The production process can be divided into the long

run and the short run.

The terms long run and short run do not necessarilyrefer to specific periods of time.

They refer to the degree of flexibility the firm has in

changing the level of output.


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THE LONG RUNANDTHE SHORT RUN

A long-run decisionis a decision in which the firmcan choose among all possible production

techniques.

A short-run decisionis one in which the firm isconstrained in regard to what production decision it

can make.

In the long run, all inputs are variable.

In the short run, some inputs are fixed


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PRODUCTION TABLESAND PRODUCTION

FUNCTIONS

Production tableshows the output resulting fromvarious combinations of factors of production or

inputs.

Total productis total output for a given inputs at aparticular time period.

Average productis calculated by dividing totaloutput by the quantity of the output.

Marginal productis the additional output that willbe forthcoming from an additional worker, other

inputs remaining constant.


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A PRODUCTION TABLE

Number ofworkers

Total outputMarginalproduct

Averageproduct

46

7653

10

25

1234

5

6789

10

0 455.75.85.6

5.24.6

4.03.32.5

410172328

3132

323025

0


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Output

3230282624222018161412108

6420

1 2 3 4 5 6 7 8 9 10

Number of workers

TP

Outputperworker

1 2 3 4 5 6 7 8 9 10

Number of workers

7

6

5

4

3

2

1

0

MP

(a) Total product (b) Marginal and average product

AP

A PRODUCTION FUNCTION


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THE LAWOF DIMINISHING MARGINAL

PRODUCTIVITY(SHORTRUNPRODUCTIONFUNCTION)

The most relevant part of the production function isthat part exhibiting diminishing marginalproductivity.

Law of diminishing marginal productivity as

more and more of a variable input is added to anexisting fixed input after some point the additionaloutput gets from the additional input will fall.

Definition:More and more of one factor input isemployed, all other input quantities constant, apoint will eventually be reached where additionalquantities of varying input will yield diminishingmarginal contributions to total product


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PRODUCTIVITY

Number ofworkers

Totaloutput

Marginalproduct

Averageproduct

Increasingmarginal returns

Diminishingmarginal returns

Diminishingabsolute returns

46

765

310

25

1234

5

6789

10

045

5.75.85.6

5.24.6

4.03.32.5

410

172328

3132

323025

0


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Output

Diminishing

marginal

returns

Diminishing

absolute

returns3230282624222018161412108

6420

1 2 3 4 5 6 7 8 9 10

Increasing

marginal

returns

Number of workers

TP

Outputperworker

1 2 3 4 5 6 7 8 9 10

Number of workers

7

6

5

4

3

2

1

0

MP

Diminishing

marginal

returns

Diminishing

absolute

returns

(a) Total product (b) Marginal and average product

AP


PRODUCTIVITY


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3 STAGESOFPRODUCTIONFUNCTIONTotal product Marginal product Average product

Stage IIncrease at an increasing

rate

Increases and reaches its

maximum

Increases(but slower

than MP) and reaches its

maximum

Stage IIIncreases at a

diminishing rate and

becomes maximum

Starts diminishing and

becomes equal to zero

Starts diminishing

Stage III

Reaches its maximum,

becomes constant and

then starts declining

Keeps on declining and

becomes negative

Continues to diminish but

must always be greater

than zero


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3 STAGESOFPRODUCTIONFUNCTION

Increasing Returns

Diminishing Returns

Negative Returns while AP is falling but

positive.

MP > 0 > AP

MP > 0 < AP

MP < 0


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PRODUCTIONFUNCTIONWITHTWOVARIABLE

INPUTS - THE ISO-QUANT CURVE

Iso-quant curve a curve that representscombinations of factors of production that results in

equal amounts of output.

A point on the iso-quant curve is technically

efficient. Qp = f { L, K }

Labor Machines Pairs of Earrings

A 3 20 60

B 4 15 60C 6 10 60

D 10 6 60

E 15 4 60

F 20 3 60


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THE ISOQUANT CURVE


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PROPERTIES/CHARACTERISTICSOF

ISO-QUANTS

Downward sloping

Convex to origin

Do not intersect

Do not touch axes Do not be vertical, horizontal or upwards


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AN ISO-QUANT MAP

Upper curve represents high production

Lower curve represents low production


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MARGINALRATEOFTECHNICALSUBSTITUTION

the rate at which one factor must be added to

compensate for the loss of another factor, to keep

output constant.

It is the slope of the iso-quant curve.

Combinations Capital(Rs. In lakh)

Labour MRTS(L : C)

A 1 20 -

B 2 15 5 : 1

C 3 11 4 : 1

D 4 8 3 : 1

E 5 6 2 : 1

F 6 5 1 : 1


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TYPESOF ISO-QUANTS

Linear Iso-quant

Input factors are perfect

substitutes

Input output Isoquant

Input factors are not perfect Compliments.

or strict complimentary

Iso quant

Units of labour

ca

p

i

t

a

l

Iso quant

Units of labour

c

a

p

i

t

a

l


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TYPESOF ISO-QUANTS

Kinked Iso-quant

Limited substitutability of

Capital and labour.

Smooth Convex Isoquant

Continuous substitutability of capital and

Labour only over a certain range.

Iso quant

Units of labour

ca

p

i

t

a

l

Iso quant

Units of labour

c

a

p

i

t

a

l

unit iv-production function

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